Stock boom bails out U.S. Treasury amid pandemic

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The stock market is booming — and the U.S. Treasury is cashing in.

Taxes on capital gains are surging, pouring into government coffers much faster than analysts had expected and propping up federal revenues despite the economic crisis caused by the coronavirus.

The nonpartisan Congressional Budget Office says it now expects “realizations” — that is, sales of assets — to jump by 45 percent, topping $1 trillion, compared to what it had expected just six months ago.

That is 10 times the rebound it predicts this year in wages and salaries.

And it will send capital gains tax receipts to their highest level in more than a decade. This year, the agency’s figures show, taxes on capital gains will surpass corporate income taxes as the government’s third-biggest source of revenue.

“It is a huge increase — one that has caught a lot of people’s attention,” said Robert McClelland, a former CBO analyst now at the Washington-based Tax Policy Center.

It’s a rare bright spot in the government’s otherwise dismal budget outlook — one that hearkens to the days of the dot-com bubble of the 1990s. Back then, swelling capital gains went a long way towards erasing the government’s deficit.

This time around, the increase is easy to miss because it merely makes the government’s huge shortfalls look less bad. In a biannual report on the government’s finances released last week, CBO said this year’s deficit will total a whopping $2.25 trillion, even without President Joe Biden’s $1.9 trillion stimulus package that’s now percolating in Congress.

The rise in capital gains is an example of how the government can benefit from the so-called K-shaped recovery, in which the stock market has gone gangbusters even as millions have been thrown out of work.

And it’s not just the federal government.


Some states are reporting surprisingly strong capital gains receipts as well. In Connecticut, officials recently announced they expect receipts to leap 39 percent compared to what they had projected in April 2020. They predicted receipts will be about equal to what they had anticipated before the coronavirus outbreak.

“They are over-performing our expectations,” said Chris McClure, a spokesperson for the state’s Office of Policy and Management.

When people sell assets held for less than a year, they pay ordinary income taxes on any profit. Those held more than a year are subject to rates topping out at 23.8 percent, depending on their earnings.

In Washington, Democrats are considering a menu of options to hike capital gains taxes, including a proposal by Biden to prevent wealthy people from passing assets to heirs tax free. Senate Finance Committee Chair Ron Wyden (R-Ore) has a proposal to begin annually taxing people’s unrealized gains.

Historically, capital gains realizations have climbed ahead of tax hikes as investors try to beat the increase.

But with Democrats’ plans still on the drawing board, and plenty of uncertainty about what, if any, will become a reality, defensive selling doesn’t appear to be a significant factor in the jump in receipts.

Budget analysts initially slashed their capital gains estimates in the wake of the virus outbreak, with CBO predicting realizations would fall in 2021 by 18 percent, to $823 billion.

Since then, the stock market has defied gravity with its vertiginous and sometimes baffling increases. Last week, CBO said it now expects realizations this year to run nearly $1.2 trillion — close to $400 billion more than it anticipated in September.

Taxes on those realizations will total $197 billion this year and $224 billion next year (much of the tax on this year’s realizations won’t be paid until next year’s filing season).

By comparison, CBO sees the corporate tax bringing in $164 billion this year.

Even as capital gains gallop ahead, CBO predicts total wages and salaries will increase by just 4.5 percent compared to what it anticipated six months ago.

That means capital gains taxes represent a growing share of all the income taxes paid by individual Americans. This year, capital gains receipts will amount to 11.6 percent of all individual income taxes, CBO projects — matching last year’s total, which was the highest level since 2000.

As a percentage of the economy, capital gains realizations will amount to 5.4 percent of GDP, which would be the most since before the Great Recession.

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