Fiscal 2020 Deficit Through June

The chart below compares the U.S. fiscal 2020 deficit by month with Fiscal 2019. The federal government’s response to the COVID-19 pandemic has had a profound impact on the federal deficit.

The deficit cumulative deficit through June was in excess of $2.7 trillion, This is $2 trillion more than the cumulative deficit through June 2019. The deficit for the month of June was estimated to be $683 billion. That means the U.S. government was overspending by nearly $23 billion per day.

The spending may be fully justified in response to the global health crisis and prevent the U.S. from falling into another Great Depression. However, it remains to be seen how long the U.S. can continue to overspend by $23 billion per day without other short-term or long-term repercussions.

Fiscal 2020 Deficit Through January

The graph below compares the U.S. federal deficit by month to the prior fiscal year. Through the first four months of Fiscal 2020, the U.S. deficit was $388 billion, which is $78 billion more than Fiscal 2019.

The deficit for January 2020 increased by $55 billion due to February payments that were made in January. It was a timing shift that occurred because February 1 was a Saturday. A similar timing shift will occur in February, since March 1 will fall on Sunday. These timing shifts will equalize by the end of March, which is halfway through the fiscal year.

Excluding the $55 billion timing shift, the Fiscal 2020 deficit is approximately 7.5% higher than last year. Based on current projections, the U.S. deficit will exceed $1 trillion, which hasn’t happened since 2012.

Fiscal 2019 Deficit Through June

Below is a chart comparing the monthly deficit or surplus for Fiscal 2019 in comparison with Fiscal 2018. Through the first nine months of this fiscal year, the U.S. government overspent by $746 billion, which is $139 billion more than last fiscal year.

The deficit for July was only $9 billion. This primarily due to $50 billion of July expenditures which were paid in June, since July 1 fell on a Saturday.

Government receipts were up by 3 percent for the first nine months of Fiscal 2019. However, expenditures were up by 7 percent. With this 4 percent spread, it’s easy to see why the deficit has grown by another $139 billion this year.

How sustainable do you think it is for expenditures increase by more than double the rate of revenues?

Fiscal 2019 Deficit Through May

The chart below compares the U.S. government’s monthly deficit or surplus for Fiscal Year 2019 with Fiscal Year 2018. Through the end of May, which is seven months into the fiscal year, the U.S. government has overspent by $738 billion.

To make a fair comparison, the May deficit is $50 billion higher, because of June payments made in May. Since June 1 was on Saturday, certain expenditures were paid in May instead of June. If you subtract out this extra $50 billion the deficit was still $688 billion, which is still $155 billion more than the prior seven month period. The CBO still estimates the Fiscal 2019 deficit will be less than $1 trillion, but it wouldn’t take much disruption, either from an economic slowdown or unexpected expenditures, to push beyond the $1 trillion mark.

Excluding the $50 billion timing, the U.S. government is overspending in excess of $22 billion per month. How does that affect you?

Fiscal 2019 Deficit through March

The U.S. government’s deficit for Fiscal 2019 through March 31st was $693 billion. This is $103 billion more than the first half of of Fiscal 2018.

The deficit for Fiscal 2019 is expected to exceed $1 trillion. Consequently, the overspending for the next six months is expected to be approximately 50% less than the first six months. The tax payments received in April are the primary reason the deficit will be much less, as the Federal government will continue to spend at nearly the same rate as the last six months.

How concerned are you with a deficit that is more than $100 billion greater than last year; a 17.5% increase?

Fiscal 2018 Deficit by Month

The graph below charts the monthly budget deficit or surplus of the U.S. government for the fiscal year ending September 30, 2018. The cumulative deficit for Fiscal 2018 was $782 billion, which was slightly less than initially projected.

Because of the timing for month-end payments, approximately $55 billion of expenditures that normally would have been paid in September, were paid in August. This timing difference caused the August deficit and September surplus to be much larger than normal.

As depicted in the graph, the government spent more than it receives nine months out of the year. The surpluses in January, April and September correspond with the timing of when estimated tax payments are due. However, the excess in these three months was not large enough to pay for the other nine months of overspending.

What do you think of a budget that overspends nine out of twelves months?

Fiscal 2018 Deficit Through May

The chart below compares the monthly U.S. deficit for Fiscal 2018 with Fiscal 2017. Through the end of May, the current year deficit is $530 billion, which is nearly $100 billion more than last year. Given the overspending to date, the federal government will likely spend approximately $800 billion more than it collects this year.

One of President Trump's economic advisers recently claimed the deficit was declining. This simply is not true. The Fiscal 2018 deficit is projected to be $125-150 billion more than last year's deficit of $666 billion. Since the federal government has overspent by nearly $530 billion over the past 8 months,  there is no way the current deficit will be less than last year.

Do you think anyone believes the current deficit will be less than last year?

Fiscal 2018 Deficit Through April

The graph below illustrates the monthly deficit or surplus for Fiscal 2018. 

The cumulative deficit through the end of April is $382 billion, which is $39 billion more than last fiscal year. The large surplus in April is primarily due to the payment of individual taxes that were due April 15th. Based on current projections, the federal government won't have another surplus month this fiscal year and the deficit will more than double over the next five months.

What are your thoughts about the Fiscal 2018 deficit?

Fiscal 2018 Deficit through March

The chart below compares the monthly deficit of Fiscal 2018 with Fiscal 2017. Through the first six months of the fiscal year, the federal government has overspent by $598 billion, which is $73 billion more than the prior year. As a percentage, the deficit is nearly 14% greater than one year ago.

The rate of growth in federal revenues has slowed since the beginning of January. Since most of the tax law changes became effective on January 1, this is not a complete shock, especially since the CBO projected the federal government would collect $1 trillion less over the next decade. Add in the additional spending approved through the Fiscal 2018 Omnibus appropriations bill, and the deficit will continue to increase throughout the rest of the fiscal year.

What do you think of the current increase of the federal deficit?

The Deficit for Fiscal 2017

The Congressional Budget Office (CBO) has finished accounting for the country's finances for Fiscal Year 2017, which ended September 30, 2017. The deficit for the year was $666 billion, and the chart below shows the budget surplus or deficit by month. 

The following are a few highlights.
▪️The deficit was $80 billion more than Fiscal 2016.
▪️Since the CBO initially projected the deficit would be less than 2016, the federal government spent over $100 billion more than initially planned.
▪️Revenues were $3.3 trillion: 1% more than Fiscal 2016.
▪️Expenditures were $4.0 trillion: 3% more than Fiscal 2016.

What do you think about the country's financial results for the past year?

Trump's Tax Plan

President Trump and several prominent members of Congress provided a framework of their tax reform plan earlier this week. The plan is intended to reduce the tax burden for most taxpayers, including individuals and corporations. There are a lot of details to be worked out, but below is a quick summary of their proposals.

• Currently, there are seven different tax brackets, which will be reduced to three: 12%, 25% and 35%.
• The standard deduction will be increased to $12,000 for individuals and $24,000 for married couples filing jointly.
• Most itemized deductions will be eliminated, except for charitable contributions and mortgage interest. The deduction for state income taxes will be eliminated, which could be significant for taxpayers living in states with high income taxes (e.g., California and New York).
• The top corporate rate will be 20%; down from 35%.
• Business income from pass through entities (S Corporations, LLCs and partnerships) will be taxed at a maximum 25% rate.
• The Alternative Minimum Tax (AMT) will be repealed.
• Asset purchases (except for buildings) will be fully expensed in the year of purchase, at least for the next five years.
• All business tax credits, except for the research and low-income tax credits, will be repealed.
• Multinational corporations will be able to repatriate income from their foreign subsidiaries tax-free.
• The estate tax is repealed.

The goal is to reduce the tax burden and simplify compliance. You may read some of the prior articles below on Tax Reform Principles that should be encompassed in a good tax reform plan. Time will tell if this plan will promote economic activity, is fair to all taxpayers and is simple to comply with. As with most tax legislation... the "devil is in the details," and we'll keep you updated as more details become available.

What do you think about this framework? Do you like it or think it's a bad idea?

The Fiscal 2017 Deficit through August

Below is a graph tracking the monthly deficit or surplus for the U.S. Government. The year-to-date deficit is $621 billion, and the Congressional Budget Office is projecting a $693 billion deficit for Fiscal 2017, which ends on September 30.The Fiscal 2017 deficit is expected to be $100 billion greater than the Fiscal 2016 deficit.

From the graph, there is a clear pattern of overspending by the federal government. So far, there are only two months during the year that recorded a surplus, which easily explains why the federal government will post a deficit of nearly $700 billion this year. Since many corporate and individual income tax payments are due today, it's possible that September will also record a surplus, which would bring the total surplus months to three. However, the occasional surplus isn't sufficient to cover the deficits that occur in most months.

What do you think about the federal government spending more than it receives for nine months of the year?

Tax Reform Principles Part 3: Simplicity and Administration

This is the the third and final article reviewing the general principles to consider when reforming a tax system. The first principle evaluated how the tax system encourages economic growth. The second addressed fairness. This article will review concepts of simplicity and administration.

There are three points to consider in the area of simplicity and administration.

• How costly is it for taxpayers to determine their tax liability and pay their taxes?
• Can the system be easily administered by the government and does it encourage taxpayers to comply with the filing requirements?
• Are some individuals able to avoid their legal liabilities?

Without question, the tax code has become exceptionally complex. As someone who has been a practicing CPA for over 25 years, I can attest to the growing complexity of tax law and difficulty of compliance. The complexity is good business for people who make a living from tax planning and preparation, but there is certainly a cost to taxpayers. Even a person or family of modest means and little financial complexity often finds it challenging to prepare their own taxes. The plethora of possible deductions and credits, that often have very specific qualification, can be challenging to understand and apply. Thankfully there are a number of inexpensive software providers that can help, but if you don't correctly answer the questions or input something incorrectly, you can easily make an error. There have been many bills passed over the past 30+ years that were touted as tax simplification, which resulted in a more complex tax system. Deciding whether the cost of compliance is overly burdensome is a subjective matter, but there definitely is a cost and be wary when Congress promises more simplification.

The U.S. tax system is based upon voluntary compliance. This puts the primary burden upon taxpayers to timely file and properly report their income and corresponding tax liabilities. Timely filing is relatively easy. You simply have to file and pay your taxes by the requisite due date. Properly calculating the tax liability can be more difficult to ascertain. As explained above, the complexity of the tax code makes it extremely challenging to calculate the correct tax. Although few people will avoid filing returns because of the complexity, the burdens of compliance can result in people failing to report certain items because it's unlikely to be discovered by the IRS. With regards to government administration, the number of fraudulent returns that have been filed over the past few years is an indication of the difficulties the IRS has processing and administering tax returns correctly. One recent example highlights their ineffectiveness. A few years ago, several hundred fraudulent tax refunds adding up to several million dollars were mailed to the same overseas address without any questions raised by the IRS until after the checks were cashed. While it's entirely possible a a common mailing address may be used, good internal controls should have identified the number of refunds being mailed to the same address as a potential problem.

On the third point, it's important to remember that tax avoidance is perfectly legal, but tax evasion is not. Avoidance involves structuring your affairs in a manner to minimize your tax liability. Part of tax complexity is a result of years of successful tax planning that Congress and the IRS deemed inappropriate, which resulted in new laws and regulations designed to close the "loopholes". Tax evasion can range from a person who is paid in cash to avoid paying taxes to wealthy individuals who fail to report millions of dollars held in overseas financial institutions. While you may have an opinion on the severity of the crime, a willful failure to report income is illegal whether it's $100 in cash you got paid to work for someone or you have $100 million parked overseas. As technology improves, so has the ability of the IRS to identify potential fraud. The IRS has also dramatically increased certain penalties for failing to comply as an additional incentive to follow the rules. However, the basic premise of voluntary compliance ultimately means some people will be able to successfully avoid paying their taxes.

How would you evaluate the simplicity and administrative effectiveness of the U.S. tax code?

Tax Reform Principles Part 2: A Fair System

This is the second installment in a three-part series discussing the principles to consider for tax reform. In the first part, we reviewed how the tax system is able to modify behavior with the intent of increasing economic activity, and more specifically, how the tax code helps grow the U.S. economy.

The second principle for tax reform is having a fair tax system. Two criteria are typically used to assess fairness.

• Does the tax system treat similarly situated taxpayers the same?
• Does the system account for the different capacities to bear the burden of taxation?

Tax law is supposed to be administered equally, fairly and objectively. Individual persons or companies should not receive different treatment when applying the same law. Even though fairness is a general foundation of U.S. tax laws, there are two areas of concern. The first is the special tax benefits (often referred to as loopholes) for a certain class or type of taxpayer. Most of these loopholes are the result of special interest lobbying and the power of individual members of Congress to write tax law that is beneficial to their constituents. These special provisions may affect a relatively small group of taxpayers (e.g. advantageous depreciation for motor sports track owners), but they rarely apply to a single taxpayer. Thus, all taxpayers meeting the criteria are to be treated equally (i.e. all racetrack owners). The second involves the ability to hire experts to maneuver an increasingly complex tax code. Large corporations and wealthy individuals are often better positioned to hire a team of experts who scour the tax code seeking the most advantageous benefits. These experts may allow them to structure their affairs to achieve tax benefits unknown to the average taxpayer. Again, these benefits are available to everyone, but you need the ability to hire the experts to know how to utilize them.

The issue of capacity to bear the burden of taxation is a subjective assessment of fairness and is open to a wide range of opinions. Fairness in taxation is very much like beauty; it's in the eye of the beholder. For some people, fairness is a very progressive tax structure whereby the more you pay a higher rate of tax when you make more money. The rate could be as high as 70-90%, which could be considered as confiscatory. A progressive tax system is designed to restrict income inequality and wealth accumulation. There is still a lot of subjectivity in a progressive system to determine how much is too much, and who gets to decide the limits. On the other end of the spectrum are those who believe in a flat tax, where everyone pays the same rate of tax, no matter how much you make. For them, the same rate of tax treats everyone fairly and equally. Our current system is a mixture of both a progressive and flat tax structure. 

Considering these two factors, do you think the U.S. tax system is fair? 

Proposed Income Tax Changes - Part I

President-elect Trump campaigned on lowering tax rates as part of his plan to spur economic and job growth. There are a lot of details to his plan, which are far more extensive than what can be covered in a single article. Below is a summary of some the essential changes.

Tax Rates for Married-Filing Jointly taxpayers

• 12% for income less than $75,000
• 25% for income $75,001 - $225,000
• 33% for income over 225,000

The brackets for single taxpayers will be 50% of the above amounts and the head-of-household status will be eliminated. An unmarried person who has a qualified dependent (e.g., single parent with child) is an example of a head-of-household taxpayer.

The current preferential rate of 20% for long-term capital gains will be maintained using the above tax brackets. The 0.9% Medicare surtax on wages in excess of $250,000 and the 3.8% Medicare tax will be eliminated, assuming the Affordable Care Act is repealed.

For corporate taxpayers, the rate will decrease from 35% to a flat 15%. 

It's estimated that U.S. multi-national companies (e.g., Apple, Microsoft and General Electric) have more than $3 trillion of earnings attributable to non-U.S. sales that have not been subject to U.S. taxation. There will be a one-time 10% tax assessed for the deemed repatriation of foreign earnings by U.S. corporations. This is an incentive for U.S. companies to bring the money back to the U.S., which is intended to spur economic growth through business expansion, acquisitions and buying back company stock.

It's difficult to predict which, if any, of the above provisions will enacted, but these changes form the foundation of President-elect Trump's tax plan.

Social Security and Medicare-Touch the Third Rail?

One of the most contentious issues in modern American politics involves changes to Social Security and Medicare. The subject is often referred to as the third-rail of politics.

The third rail references the high voltage rail of electric trains and subways. Contact with the third rail can lead to death. In politics, the same goes Social Security. Proposing to change the current program can lead to political suicide, or at least the loss of an election. Since getting re-election is a high priority for most politicians, it's understandable why politicians try to avoid this topic as much as possible.

No matter how hard the resistance, Social Security and Medicare will change. Why? Social Security and Medicare programs are spending more than they are currently collecting in taxes. Ignoring the potential concerns about the Social Security Trust Fund and the "Lockbox" (which are addressed in A Sinking Nation), the U.S. government predicts the retirement surplus of Social Security will be depleted by 2034 and the disability funds will be depleted by 2023. Consequently, even without any legislative revisions, future benefits will eventually be reduced to about 70% of the amount due because of a lack of funds. Of course, Congress could proactively pass legislation to fix the problem, but it would require them to touch that third rail.

Although 2034 sounds like a long time in the future, it's less than 18 years away. Do you remember Y2k and the start of a new millennium? Seem like a long time ago? The new millennium started 16 years ago, and we're nearly halfway to 2034. In reality, 2034 will be here before you know it.

Unless something changes dramatically in Washington, don't expect Congress to take any action on Social Security in the near term. However, the fact remains... changes to Social Security will eventually occur; either through legislative changes or a lack of money.

Deficit Spending: The Exception or the Rule

Deficit spending occurs when expenditures exceed revenues. In the past 80 years, the U.S. government has spent less than it received a mere seven times. It has happened only once since 1960 (in 2000). With this track record, it seems fairly clear that deficit spending is the Rule for Washington and not the Exception. 

There may have been lots of economic, political and social reasons why the government has incurred a budget deficit, but the pattern is clear. The U.S. government continuously spends more than it receives. 

With this track record, any sane financial adviser would tell you to change your behavior. You simply can't spend more than you make forever, and neither can the U.S. government. Despite the warnings and some attempts by Congress to balance the budget, Congress has not been able to break the habit of overspending. Based on the current budget projections, the U.S. will continue to deficit spend for the next decade.

What will it take for our government to change the habit from deficit spending to balanced budgets, at least more than once every 50+ years?