The U.S. is racing up toward the "fiscal cliff", a horrible deal agreed to by both houses of Congress that is so terribly unthinkable that the two sides which agreed to it figured no one would ever let the situation proceed to that outcome. Now both sides are playing "chicken", as the deadline zooms toward us. Those who are advocating austerity of federal spending don’t have a genuine understanding of the severity of cuts that would be needed to balance the budget. And those who think that the problem can be solved through higher tax collections are similarly clueless about just how much money can be reasonably brought in.
The chart above helps us to see this point more clearly. The price plot of the SP500 is shifted forward by 12 months to reveal how total federal tax receipts tend to rise and fall as an echo of what the stock market does. The drop in stock prices during the summer of 2011 says that tax receipts should see a similar stumble (on a 12-month basis), and the tepid rebound says that tax receipts on an annual basis are not going to get much higher than what we have been seeing. And if the stock market follows its typical path for the first two years of a new presidential term (2013-2014), then we cannot expect to see the stock market bend the tax collections curve much higher for the next couple of years.
The whole reason why this is so important has to do with the vast spread between receipts and expenditures, as shown in the chart below. Each is expressed as a percentage of GDP, to help us better see the magnitude of both of them.
