My estimate is that over $360 billion in non-withheld income taxes will be paid to the US Treasury this April; approximately $86 billion or one third more than the $278 billion non-withheld receipts in April 2018. Since much of this money is likely still in the stock market, the bull market could be in big trouble.
April 15, 2019 is Tax Day when all 2018 income taxes not withheld by employers, including capital gains, are due. The amount due this year could be stock market decimating: Not only are capital gains taxes likely to be well over $50 billion more than the about $179 billion paid last year; but that doesn’t include an estimated $20 to $40 billion in underwitholding as a result of changes to the income tax withholding tables after the 2018 tax cut.
Where I get these numbers in part is due to recent conversations with Mark Booth who for 30 years was at the Congressional Budget Office and was their guru on income tax collections. Mark retired last year, so I can now report that since I befriended Mark in 2000, he was «my favorite Washington Economist» whom I referred to frequently with questions about income taxes but never used his name in print or on the air. Mark now runs Booth Financial Consulting, and is the most knowledgeable economist anywhere as to US income tax collections.
This April won’t be the first time that capital gains tax payments crashed the market. Remember 2000? At the end of January 2000, I had turned bearish while running TrimTabs Investment Research – assuming that after the usual big year end inflow into equities, stocks had to sell off. Why? Between insiders selling an estimated $80 billion monthly in unlocking internet IPOs sold in 1998-1999 and option conversions, the long-term bull market would collapse because there was not enough new money to buy those shares.
Well, I was too early. Investors borrowed over $100 billion in margin debt in the first quarter of 2000 and that kept stock prices elevated. However, the Nasdaq highflyers made a decade long peak the first week of April 2000. Why? $130 billion in capital gains were due that April and the sale of stock to pay taxes crashed the market.
Capital gains tax payments are estimated by the Congressional Budget Office to grow some $20 billion this year from 2018, presumably much occurring in April. I think the gain could be as much as $55 billion more – and maybe even lots more. Here’s why:
- In 2018, there were $500 billion more in new share buybacks plus cash takeovers than the prior year. If the profit on that $500 billion was 30%, or $150 billion, and if 40% was taxable (at least half of all equities are held in tax exempt accounts such as pension funds, etc.), then 2019 capital gains taxes due at a 20% tax rate would be at least $12 billion more than the prior year.
- US stocks dropped $5 trillion in Q4 of last year. Given a four to five leverage factor on both the up and downside for new money: If $1 trillion of stocks were sold in Q4 and if 40% were in taxable accounts and again 30% was profit at a 20% tax rates at least $24 billion in extra capital gains taxes are due.
- The US stock market this year has recovered about $3 trillion of the Q4 2018 plunge. That means to me that much of the tax money owed has been put back into stocks.