Two topics today:
Topic #1: Yes, we watched the US Presidential debate last night, and no, we don’t want to talk about it, but it did remind us of a useful dataset that looks at Federal tax receipts as a percent of GDP. A longtime (and very successful) money management client pointed out this relationship to us many years ago, and it is highly relevant just now.
Here’s the chart back to 1929, concluding in 2019. The y-axis range runs from annual Federal tax receipts being 2.5% of GDP all the way up to 20.0%.
Before we dig into this chart, we’re sure you are wondering where 2020 will come out. Our estimate based on data from the Daily Treasury Statement is 14.6% ($3 trillion of tax receipts, $20.5 trillion GDP). That’s spot on the 2009 – 2011 experience (visible just after the rightmost gray recession bar), which averaged 14.6% as well.
That’s a good segue to the broader discussion of what this chart shows, namely that Federal tax receipts are remarkably stable relative to GDP across a very long-time frame and many different tax regimes. For example:
- In 1960, there were 23 individual tax brackets, starting at $4,000 for a married household ($35,000 now) at a 22% marginal tax rate and ending at $400,000 ($3.5 million now) with a 91% marginal tax rate.
- In 1986, there were 14 individual tax brackets, and for married household taxes those started at $3,670 ($8,700 today) with an 11% marginal rate and the highest bracket was for income over $175,250 ($416,000 today) at 50%.
- In 2006, there were just 5 brackets, starting at 15% for married household income over $15,100 and ending with 35% for income over $336,500.
Quite a range here, but in each one of these 3 years the proportion of Federal tax receipts to GDP was 17%. As a reminder, individual taxes/withholding are always the lion’s share of Federal receipts (corporate taxes are 9% of receipts in 2020FY, 13% back in 2010FY for comparison).
The point here is that tax receipts are historically cyclical and have much more to do with economic growth than tax rates. Every cycle’s peak percentage (1969: 18.4%, 1974: 17.0%, 1981: 18.7%, 1987: 17.6%, 2000: 19.8%, 2007: 17.8%) came well into a recovery and was independent of tax policy. Another example: the post-World War II peak was in 2000 at 19.8%, when US labor force participation was at an all-time high and capital gains were at their zenith due to the 1990s stock market run.
Takeaway: this is not to say tax policy doesn’t matter – it obviously does – but only to the degree to which it provides a productive tailwind to other macroeconomic drivers. History clearly shows the best way to generate the most tax revenues is to have stable, growth-friendly fiscal and monetary policy.
Topic #2: We recently showed that, far from COVID-19 reducing the use of cash in the United States, the amount of currency in circulation has actually increased in 2020; today we’ll look to see if that trend also exists in Europe.
The short answer is “Yes, there is also more currency circulating in Europe now than December 2019”:
- 8.2% greater value of 5, 10, and 20 euro notes in July 2020 than year-end 2019.
- 8.6% greater value of 50, 100, 200 and 500 euro notes than year-end 2019.
- Even though the ECB is slowly removing 500 euro notes from circulation, they are more than replacing them with 200 euro notes. Aggregate growth of the value in circulation between these two denominations is +6.5% from year end 2019 to July 2020.
- The total growth of euro cash in circulation YTD through July 2020 is 8.5%.
- Interestingly, the growth in 1- and 2-euro coins in circulation YTD is much lower: just 1.5%.
Final point/summary: as the following ECB chart shows, the value of paper currency euros in circulation has continued to rise since 2016, a period over which no new countries have entered the Eurozone (Lithuania was the last, in 2015). That last leg up is this year. As we noted in our US currency analysis, this is a classic sign of consumer stress/uncertainty and (we assume) the rising popularity of cash as a tax avoidance mechanism.
The investment takeaway is simple: people hoard cash at the bottom of economic/market cycles. As an upturn takes hold, they relax a bit and (hopefully) start to spend that currency.
US historical individual tax rates, 1982 to present: https://files.taxfoundation.org/legacy/docs/fed_individual_rate_history_nominal.pdf