Do Accelerated Tax Refunds Explain Year-To-Date Consumer Strength And Record Low Government Tax Withholdings?
Courtesy of Tyler Durden
Our recent disclosure that in February tax withholdings have plunged to multiyear lows prompted readers to inquire what may have caused this precipitous drop in light of alleged strong consumer behavior, and an “improving” economy. While we won’t comment on the absurdity of the last statement, we do have some ideas. As we have noted, the tax withholdings are net of tax refunds. As such the first place to look for clues is individual tax refund patterns in 2009 and 2010. And indeed, as the charts below demonstrate, even as the government has manifested a great disdain for filling its coffers with money from individual taxes (on a net basis), realizing that instead it can do so using near 0% cost of capital debt funding, compliments of gluttonous “direct bidders” and primary dealers, the Treasury has been throwing out far more in refunds so far in 2010, compared to 2009. 6% more, in fact, on a cumulative basis. Is this the incremental cash that has so far sustained America’s retail season? And what happens when 2010 refund patterns catch up with the 2009 reality? We demonstrate that we have already passed the inflection point. As Kevin Spacey says, it is all downhill from here.
One of the primary reasons why consumers may have exhibited an abnormal propensity to spend in January and most of February (at least according to government, if not Gallup, data), is the much greater individual tax refunding conducted by the Treasury/IRS this year compared to the prior year. Yet, as the chart above shows, the inflection point has been reached, and after weekly 2010 refunds were greater than comparable amounts in 2009 by 22%, 8% and 11% in the first three material weeks of refund season, the last two have been negative, as accelerating refunding catches up with consumers. This is much more visible on a cumulative refund basis.
Indeed, as the year has progressed, the cumulative refund differential has collapsed from 24% to just 6%. And while total refunds in 2009 were $284 billion, several forecasters have called for a total 2010 refund season of ~$260 billion, meaning that over the next 2-3 weeks the blue line will sharply cross below the red line, as consumers have extracted (and spent) as much as they could from the government.
Why the increased refund activity in 2010? With withholdings in 2010 offsetting 2009 numbers by nearly the same amount as the differential in YoY refunds, it appears that the IRS has gotten either much looser about sending money back to US taxpayers, or consumer are frontloading their refund activity even more in 2010 than in 2009. Once the IRS provides detailed filing statistics, we will update these charts with filer numbers and the size of average refund.
Yet what is undebatable is that normalizing for Year over Year changes in retail numbers and other consumer “strength” indicators, when adjusting for the $8 billion in additional tax refunds (or 6% of total) received in 2010 by Americans, certainly plays a major role in explaining why the retail sector has not collapsed even as consumer credit refuses to budge higher. Had consumers been deprived of this incremental cash, purchasing activity would have declined at least 6% on a nominal basis. Which is why readers should keep an eye on refund activity as the year progresses to conclude if we have already passed the IRS/government-sponsored inflection point.