Workers Get More Of The Pie
When the federal government's tax receipts for June were totaled, they turned out to be so strong that economy watchers began sharply lowering their deficit estimates for fiscal 1997. The betting now is that the deficit this year could fall to $50 billion, far below the Congressional Budget Office's projection of $120 billion last January.
But the real news, according to economist Joseph Carson of Deutsche Morgan Grenfell, was buried in the data on the sources of government revenues. "Tax receipts are a sensitive gauge of economic activity," he says, "because they are the hardest of all data series--mainly reflecting taxes paid on income generated from current production."
In June, notes Carson, the strength in tax receipts was on the individual and not the corporate side of the equation. Moreover, the fact that the biggest gains over June of last year were posted by withheld taxes rather than estimated tax payments suggests that the revenue surge was tied not to capital gains but to increases in labor earnings.
Indeed, withheld tax receipts, which usually rise in line with wage and salary income, are rising far faster this year--up about 9% over 1996, vs. 7% or so for reported wage gains. "Apparently, employment growth and growth in wages and hours have all been understated this year," Carson says.
That's not all. Carson points out that in June, for the first time in the current expansion, federal withheld tax receipts showed a larger year-over-year gain than quarterly corporate tax payments, which reflect companies' estimated taxes for the second quarter (chart). Adjusted for the number of workdays in the month, the rise in withheld tax receipts was 12.1%, vs. an anemic 1.3% rise in corporate tax collections. Unadjusted, the rise was 17.7%, vs. 6.4%.
This dramatic shift in tax receipts, says Carson, suggests not only that labor markets and wage gains are strong but also that a greater share of income from current production is now flowing to workers and less to companies. The upshot, he concludes, is that "the shrinking federal deficit--which might signal declining interest rates in other circumstances--appears more and more likely to be accompanied by rising ones."