Broke: Geithner says so … but, Q4 tax revs are surging … huh?

Somebody explain this to me.

Turbo-tax Tim Geithner sent Harry Reid a conveniently timed  letter yesterday, reading in part:

Dear Mr. Leader:

I am writing to inform you that the statutory debt limit will be reached on December 31, 2012, and to notify you that the Treasury Department will shortly begin taking certain extraordinary measures authorized by law to temporarily postpone the date that the United States would otherwise default on its legal obligations.

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OK, the fact that the U.S. is broke and has exhausted its credit line is not new news.

Here  what I don’t understand.

In prior posts, we’ve the dynamic called “Tax induced selling”

Simply stated, when capital gains tax rates are expected to increase, many investors sell appreciated holdings before the rate increase in order to pay taxes at the current, lower capital gains tax rate.

As a result, tax revenues increase … in the period when the capital gains taxes are incurred.

That is exactly what happened following the enactment of the Tax Reform Act of 1986, which increased the top capital gains tax rate from 20 percent to 28 percent.

Capital gains realizations almost doubled in 1986 and then fell back in 1987 as investors rushed to take advantage of the soon-to-expire 20 percent rate.

There are widespread reports that tax induced sellinghas been happening big time this quarter,

So, tax revenues should be surging, right?

And, the day of debt reckoning should be pushed off for awhile.

But, Geithner says “no … sooner than expected”.

How can that be?

My only hypothesis is that investors aren’t paying the estimated taxes associated with the appreciated asset sales.

That’s legal … but they’ll incur some late payment penalties in April when they file their taxes.

Or, Geithner forgot to count the likely surge in tax revenues.

Hmmm.

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