Falling Taxes Will Case The Government Deficit To Soar

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Taxes — a “four-letter word” for most people who bring home a paycheck.

But the reality is that taxes are also a measure of your prosperity. The more taxes you pay, the more income you bring home that year.

While I hate paying taxes, mainly because of the wasteful spending our government uses it for, I know that as I pay more taxes, I am making more money.

When compiled on a large scale, it is a sign of how strong the economy is as a whole.

As the government collects more taxes, it means our economy is growing.

As the government collects less taxes, our economy is shrinking — which is exactly what we are seeing now.

Specifically, we’re seeing less corporate income taxes.

The U.S. economy is now in its fifth consecutive quarter of a corporate earnings recession.

That means income being paid to the government is in decline — the kind of decline that has preceded the past two recessions, and will likely precede the coming recession as well.

Not only are falling corporate income taxes leading to a recession, but they are also leaving the Fed with no choice but to keep rates at these extremely low levels — an environment that is set to remain for an increasingly long time.

Let me explain…

The Risk of Falling Taxes

Taxes are somewhat like the lifeblood of our economy. While our government may not use them efficiently, they are a clue as to how well our underlying economy is faring at the moment.

Right now, corporate taxes are in borderline recession territory, and, by the end of the year, they should clearly be there. Take a look:

The red shaded bars represent the past two U.S. economic recessions. As you can see, corporate tax receipts have fallen in a similar fashion going into these recessions.

If the second and third quarters of this year come out with lower corporate income taxes, it’s likely the consumer won’t be strong enough to keep us out of a recession — an increasingly likely scenario.

We all know by now that it was the consumer who supported the economy in the second quarter. Even so, corporations continued to struggle, leading to yet another fall in corporate income tax.

But, as we claw through yet another earnings season of falling profits, it seems our corporate earnings recession may linger on until the end of the year. In other words, third-quarter tax receipts will also continue to fall.

If we chalk up a decline in tax receipts for the second and third quarters, the U.S. economy looks increasingly like the recession of 2000 on the chart, with a beeline for a 2008-type of recession.

Need for Unconventional Yield

This sluggish, recession-like economy is not one in which the Federal Reserve will be gung ho about raising interest rates. Rather, the Fed is likely to join the rest of the world in what has become a race to stimulate individual economies — be it with negative rates or ramped-up versions of quantitative easing.

In short, there is no end in sight for the decrepit interest-rate environment we are in. What that means is that your need for income from unconventional sources will not let up.

A few weeks ago, I mentioned three possible ETFs that were ripe for opportunity once they reached certain levels.

While we are not there yet, those three — the Utilities Select Sector SPDR (NYSE Arca: XLU, buy below $48.50), the SPDR Dow Jones REIT ETF (NYSE Arca: RWR, buy below $95) and the iShares Core High Dividend ETF (NYSE Arca: HDV, buy below $79) — have declined 3.8%, 2.1% and 0.88% since then, respectively.

So these ETFs are clearly reacting as I expected they would post-Fed meeting, as expectations for another interest-rate hike this year creep back into investors’ realm of possibilities.

Just give it a little more time, and these ETFs will fall into our buy range, allowing you to scoop them up and begin picking up strong dividend yields and share-price appreciation.

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