Leave it to Tom McClellan to look at how stocks react to the tax rate (as a percentage of GDP). I find this data absolutely fascinating. The good news is, at least as of right now, if stocks are to fall, it won’t be because tax rates are too high. Take a look at Tom’s most recent study below. For those interested all his studies can be found (free) at www.msoscillator.com.

Treasury Department Is Not Biting Too Hard

 The good news for the stock market bulls is that the federal government is not taking too big of a bite out of Americans’ incomes.  The latest data from the Treasury Department show that total federal receipts from all sources for the 12 months ending September 2019 amounted to 16% of GDP.  That still seems like a pretty high percentage empirically, but it is below the average of the past 4 decades.

This week’s chart compares that measure of the tax bite to the movements of the SP500.  The important lesson is that pushing taxes up too high tends to cause recessions and bear markets, eventually leading to a falloff in total tax receipts.  Generally speaking, 18% qualifies as “too high” because we have seen a recession every time it has gone up there.  Even getting close to 18%, as we saw in 2007 and 2016, can lead to economic distress.

But lower readings like we see now tend to be followed by months or years of uptrend for stock prices.  More money gets left in the hands of taxpayers, and so they can do things like bid up stock prices with it. 

The problem is that taking in 16% of GDP in taxes does not pay the bills.  The last 12 months’ expenditures by the federal government amounted to 20.6% of GDP.

For FY2019, which ended in September, total raw dollar receipts were up 4.0%, which is pretty good.  But total raw dollar expenditures were up 8.2%, because our elected leaders in Washington, D.C. cannot get control of their spending impulses.  It is a spending problem, not a taxing problem.  And it does not help that Baby Boomers are entering retirement and starting to draw Social Security and Medicare in larger numbers than the older generations are dying off.  So we have a spending problem, and an actuarial problem, but not a taxing problem.

And those problems are really only a concern to those of us who don’t want to leave a mountain of debt to our grandchildren.  For investors, a deficit like that is an enormously stimulative force for the stock market.  Here is that comparison:

The higher the deficit now, the more bullish it is for the months that follow.  Deficits only become a problem for the stock market at the point when somebody tries to do something about it.  But while they are at a high level and climbing, it is reminiscent of the old saying, “A fool and his money… are some party!!”