Although the fiscal cliff crisis was resolved a year ago, the price of the tax increase was not clear. Now that April 15th, tax day, is here, the impact can be assessed. In the first quarter of 2014, tax receipts from individuals were up about 15%, for an additional $35 billion of Government revenue. This is money that was not spent to help business create jobs. This fiscal drag is reflected in consumers postponing purchases, and in many cases selling stock to raise the cash to pay their tax bill. In contrast, last year tax refunds were up 15%, which might explain last year’s better than expected consumer spending and market performance early last year.
Last year’s fiscal cliff settlement raised payroll taxes and marginal tax rates for high-income earners. Many exemptions and deductions continue to be phased out, and the maximum tax rate on capital gains was raised. For many who pay estimated taxes, or pay through withholding, the increase was not collected during the year. Finally, now in the first quarter of 2014 and the days leading up to April 15, the bill has come due. The impact of the fiscal cliff is finally being felt with a one-year lag.
Moving forward, the worst may be behind us. Consumer spending, first-time filings for unemployment benefits, (and the weather), continue to improve. As the economy continues its upward trend and tax induce stock selling abates, the market may continue to track upward driven by improving corporate earnings.