Why Your Taxes Won't Cut the National Debt for Long

The U.S. Treasury reported earlier this week that the federal government ran a rare surplus in April, bringing in $113 billion more than it spent during the month and helping to reduce the overall national debt. Yet while many are celebrating the news, it's far too early to declare victory over the nation's crushing debt load, as the one-time windfall that the Treasury enjoyed during April is unlikely to repeat itself in the future.

U.S. Treasury Building, Washington, D.C. Image courtesy Wikimedia Commons.

Why this April was special
During most years, April is a good month for the Treasury because it receives the largest portion of its tax revenues then. Although most Americans have the bulk of their tax withheld from their paychecks, many who earn their income from other sources, such as self-employment or investment income, make estimated quarterly payments and then pay the remainder in April when they file their tax returns. In addition, the first of the four quarterly payments that those taxpayers have to make is due on April 15, further boosting the Treasury's coffers.

April 2013 was particularly good for the government, representing its biggest surplus since April 2008. But before you start celebrating, you need to understand that one-time factors were largely responsible for a big influx of taxpayer cash, and those factors probably won't apply in future years.

To get the big picture, you have to turn back the clock to last December. At the time, lawmakers and the president were fighting about the impact of the fiscal cliff and what to do about it. Huge potential tax increases were on the table, as the law that had created substantial tax cuts in the early 2000s was set to expire and bring back the much-higher tax rates that had prevailed before those cuts took effect. In the end, a last-minute compromise limited the largest impact of the fiscal cliff to high-income taxpayers.

But in the lead-up to the fiscal-cliff deal, taxpayers had no confidence that the government would reach an agreement. As a result, many taxpayers took the unusual step of pulling as much income as possible into the 2012 tax year, for which lower tax rates had already been established.

Moreover, corporations assisted taxpayers in achieving the same goal by making larger-than-usual dividend payments to their shareholders. Casino giant Wynn Resorts (NASDAQ: WYNN  ) , warehouse-club retailer Costco (NASDAQ: COST  ) , and hundreds of other companies declared special dividends that sent billions of dollars into investors' hands, much of which they had to count as taxable income. Moreover, many other companies decided to take dividends they had planned to pay in 2013 and make payments early instead. Wal-Mart (NYSE: WMT  ) paid its usual January dividend in December, while Oracle (NYSE: ORCL  ) actually made three quarters' worth of dividend payments at the end of 2012.

What's ahead for tax revenue
Many analysts have noted that the new higher income tax rates will lead to greater revenue for the government, which should help efforts to reduce the budget deficit going forward. Moreover, an improving economy naturally helps increase income and leads to more taxes flowing into the Treasury.

Nevertheless, treating April's big budget surplus as if it marked the end of the nation's worries would be a huge mistake. The government has a lot of work left to do if it wants to eliminate its budget-deficit woes once and for all.

The government might benefit from making the same cost-cutting moves that Costco shoppers have benefited from over the past several decades. Yet even though the warehouse retailer's stock has produced huge returns for longtime shareholders, is the ride over for Costco investors? To answer that and more, The Motley Fool's compiled a premium research report with in-depth analysis on Costco. Simply click here now to gain instant access to this valuable investor's resource.

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  • Report this Comment On May 12, 2013, at 4:11 PM, ckh2 wrote:

    Washington needs an April 15th every month to dig out of their self inflicted hole.

  • Report this Comment On May 13, 2013, at 4:36 PM, mdk0611 wrote:

    Well said. A lot of taxpayers who took in extra capital gains or dividends were in a safe harbor with respect to tax payments by having 100% or 110% of their 2011 taxes paid in by 1/15/2013. April 15th was the time to pay the piper without penalty. Add to that 1 time windfall the increase in payroll taxes and this is the result.

    The payroll taxes will be replicated next year, but not the windfall.

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