As we detailed previously, the growth of federal income and employment tax withholdings, the broadest and most timely read on the health of the job market "has been sinking at an alarming rate." What is worse, as ConvergEx's Nick Colas notes, IRS and Treasury data show refunds tracking 2-3% below last year’s levels - not good news for companies that focus on the low-end consumer, the cohort that tends to spend (rather than save) their refunds.
The Daily Treasury Statement is essentially America’s checkbook, and offers a read on two important issues: the pace of tax refunds and growth in wages.
We’re right in the middle of the January – May refund season, when the U.S. Treasury pays +$270 billion in lump sum payments to +100 million American households. Those remittances, which this year average $3,164, are an underappreciated fillip to Q1 consumer spending and household debt reduction. Through the end of February, both IRS and Treasury data show refunds tracking 2-3% below last year’s levels - not good news for companies that focus on the low-end consumer, the cohort that tends to spend (rather than save) their refunds.
On the wage growth side, it’s the proverbial half empty/full glass. Income tax/withholding payments to Treasury are up an average 3.6% over the last three months (half full), but that run rate is noticeably lower than the 6.0% growth at the same time last year (half empty).
Death and taxes may be inevitable, but they also seem to inspire great art. Pondering one’s own mortality inspires the creative mind to produce something that outlasts the mortal coil, of course. And, oddly enough, the need to “Render unto Caesar” his provides a similar impetus.
Take, for example, The Rolling Stones circa 1971. Then at the height of their fame, they also happened to be at the nadir of their financial success. Thanks to a series of unscrupulous managers and advisers, they were not just near broke but they also owed Her Majesty’s government a million dollars. Marginal tax rates in the UK were +80% at the time. They simply couldn’t pay their tax bill if they recorded their next album in the United Kingdom.
So, they did what real rockers do – they fled to the French Riviera, where Keith Richards rented a large villa and the band recorded in the basement and partied everywhere else. The place is called Nellcote, and there is a link at the end of this note to +40 pictures of the Stones in residence there. The double album they created during this time: “Exile on Main Street”, as in “tax exile”. Most Rolling Stones fans put it at or near the top of their list, and as with all great 1970s albums (think Fleetwood Mac’s “Rumours”) the story behind its creation is part of the magic.
Taxes – tax data, really – can also tell important economic stories and although this is an under-used vector in macro analysis, it is worth a look. Take, for example, the income tax and withholding payments made to the U.S. Treasury. Most working Americans have their taxes and social program contributions taken out of their paychecks, and those in the “gig economy” (real estate agents, Uber drivers, and other contractors) make separate remittances to the government from their earnings. The U.S. Treasury posts a daily report that outlines these payments, along with everything else the Federal government both receives and pays for. Links to this report – the Daily Treasury Statement – are available at the end of this note.
From 2010 - 2015, growth in withheld individual income taxes/other payments averaged 5.1%. That’s far better than the GDP growth, for example, which has not breached 5% in any quarter since the Great Recession. The repeal of the Bush tax cuts on higher income households didn’t have much of an effect, with 2010-2015 withheld income tax/other payments running a very consistent 5% year over year growth.
This means that the part of the U.S. labor force that pays Federal income tax – those who make roughly $50,000/year and higher – has seen steady wage gains for the last half decade. Keep in mind this doesn’t include capital gains or small business taxes – those appear in other entries on the Daily Treasury Statement and are not included here. This is simply the growth in the withholdings that go to Uncle Sam every paycheck from those workers who receive a paycheck.
In a troublesome development, the growth rate of individual tax receipts/withholdings is now showing signs of a slowdown. Adjusting for the effect of a leap day, average 3 month growth ending February 2016 is now 3.6%. Taking into account those in the growing “Gig economy”, it is still just 3.7%. That is well below the 5 year run rate of 5.1%. The slowdown started in late 2015 and reflects the slowest growth in withholding (using 3 month rolling average because the data is choppy) since 2012.
Why is this happening? I can think of three reasons.
First, the types of jobs the U.S. economy has been creating over the last few years may be lower paying than average. Lower marginal incomes lead to lower tax remittances, and eventually this trend finds its way into the tax data.
Second, the “True” pace of job growth may have been slowing before the official Employment Situation report picked up on the trend in Q1 2016. The Friday jobs number is, after all, just a survey. Tax data reflects the actual truth.
Lastly, companies may be starting the process of controlling direct employee costs wherever possible. No matter what the answer, the tax data we’re discussing is clear: total wages are not growing as quickly as they have been.
The other tax story worth a look relates to individual tax refunds. Both the Daily Treasury Statement and the Internal Revenue Service report on the size and pace of these payments, which occur annually between January and May as filers get their returns to the government. Last year these payments totaled just over $274 billion, with average refund payments of $3,048 at this point in 2015. While many refund recipients report using these monies to pay down debt (usually prior Holiday credit card balances) or for savings, lower income households do spend their refunds. If you want to read more, Jessica found a great paper from the Harvard Business School on where this cohort spends the cash (link at the end of the note, naturally).
Year to date, refunds are running slightly behind last year’s levels:
Through the 8th week of the year, DTS data shows refunds paid are running a total of $3.7 billion behind last year’s payments, or 2.9% lower than 2015.
IRS reporting tells some of the reasons why. Total returns processed are down 1%, and total returns received are 0.4% lower through February 26. More individual filers seem to be going it alone this year – self-prepared filings are up 3.8% while those prepared by tax professionals are down 3.6% year to date.
The number of returns that merit a refund are, however, down more than the 1% drop in returns processed. Year to date, the number of refunds paid (46.5 million) are down 2.1%. Average refunds are basically flat at $3,053 versus $3,048.
Now, we’re only about halfway through refund season, so there is still time to see some growth in the numbers. There have been numerous reports of slower return processing as the IRS combats cyber criminals who try to file fake returns and hijack a taxpayer’s refund. But the early data is a touch weak, and that is worth noting as we consider the pace of U.S. economic growth in the quarter. As the old saying goes, “A billion here and a billion there and pretty soon you’re talking about real money.”