A tax day for ants causes more stress for the US Treasury as debt ceiling D-Day nears
How will the government fund itself if it can't even fit inside the weak April tax revenues?
Dear readers,
Debt ceiling doomsday is almost here, again. For the 7th time this decade (seriously), the US government is approaching its proverbial debt ceiling, when the choice will have to be made to default on its debt obligations to global US Treasury holders or raise the roof by a few trillion dollars more.
While we all know that this is a sham and the inevitable decision will be to raise the non-existent limit, weak April tax revenues and a looming maturity wall are piling onto the funding stress for the US government, and intensifying the marketwide liquidity drain that will soon turn into a headwind for asset prices. Let’s break it down.
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What is this, a tax day for ants?
The fiscal stimulus that blessed US consumers far and wide with spending power has virtually all run dry. Not only are consumers spending less, but their incomes have also fallen—both lead to lower taxes for the US federal government. Reduced capital gains-related taxes following the 2022 bear market have also lowered April tax revenues.
The US Treasury’s cash account at the Fed increased by a paltry $108 billion on April 19th, a lackluster tax collection compared to last year’s $298 billion on tax day alone:
While we are still awaiting all of the data to be entered, including some residents with extensions out as late as mid-May, it’s clear that the disappearance of fiscal stimulus, decelerating labor market, and lower capital gains taxes will make for a much worse tax season this year compared to last, much to the chagrin of Uncle Sam.
Many economists have been projecting that the Treasury could continue operating without a debt limit increase until early August, but now economists are shifting their timetable forward to early June as tax receipts undershoot. The Treasury Department itself just warned the government that it will no longer be able to meet its funding needs as early as June 5th. That’s right, the Treasury won’t be able to fund itself without a debt ceiling increase as soon as two months from now.