Are Federal Tax Receipts Declining?

Econintersect:  Last Sunday we had an article by Minyi Chen in the What We Read Today feature which reported on a recent down trend in growth of Federal tax receipts.  This raises the question about whether this may reflect an economic slowdown.  One of the key graphics in Chen’s presentation is shown below.

Click on graph for larger image.

Lee Adler has contributed past reviews of federal tax receipts and the correlation of same to economic activity and stock market performance.  Econintersect contacted Adler about the observations of Mr. Chen and received this response:

“Chen is correct, although using CPI to adjust to real is not technically correct. Employee compensation grows at a different rate.  I use BLS average weekly earnings, but it’s very volatile so I end up smoothing the adjustment anyway. Getting an accurate estimate of the real rate of change is extremely problematic. For the purpose of analyzing directional change, the nominal data suffices. “

Adler provided the following graphics from his latest comprehensive Professional Edition Treasury Update (as of Saturday, 10 August 2013):

Figure 1.

Click on graph for larger image.

Figure 2.

Click on graph for larger image.

Adler also included the following commentary from 04 August:

As of July 31, the end of month, month to date withholding tax receipts were 14.7% ahead of last year. Two calendar factors boosted the July data versus last year. First, this June had one less day for collections than last year. The taxes for June 29 and 30 were collected in July, skewing the total for July 2013 versus July 2012. In addition, this year July had one more business day than July 2012. July 2013’s numbers are therefore artificially inflated. The moving total method used above is a more reliable indicator of the current state of withholding tax collections.

While excise tax deposits are collected from large businesses throughout the month, smaller businesses are only required to pay quarterly.  July 31 is a quarterly due date for most excise taxes.  The gain of just 1% is another sign that the economy slowed in July. One of the largest components of excise taxes is the gas tax. With rising gas prices, gasoline consumption may have declined.

……..

Quarterly corporate taxes are not due in July, therefore the comparison for this month is not particularly useful.

Figure 1 delivers two important messages:

• Federal withholding tax receipts have been trending down the beginning of the year.

• Federal withholding tax receipts are clearly above the level of the same time last year.

Figure 2 adds an additional piece of information:

• July produced a clear break below the 12-month trendline for ghrowth of federal withholding receipts.

• However, the decline in July is similar in magnitude to other fluctuations seen over the last year.

So, the answer to the question “Are federal tax receipts declining?” is “No.”  The graphs from The Wall Street Examiner, as well as the analysis by Chen, are for withholding receipts, but that is the elephant in the room, accounting for more than 90% of all taxes collected most months.

Tax receipts are still growing year over year, but the rate of growth slowed in July.  And that is what the Chen analysis showed as well.

John Lounsbury

Sources:

• Real-Time Tax Data Indicates U.S. Economy Rapidly Losing Steam (Minyi Chen, Advisor Perspectives dshort.com, 09 August 2013)

• Private communication from Lee Adler, The Wall Street Examiner.