Posted by on May 8, 2017 12:48 am
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Submitted by Nicholas Colas of Convergex

April Was Cruel… To the US Tre

Our monthly review of tax data from the US Treasury’s Daily Statement shows three important points.  First, overall employment and wage trends in the US are still on a solid footing.  Individual tax/withholding payments from salaried/hourly workers rose 4.5% year over year in April and are up 3.7% on a three month rolling average basis.  Second, April tax season was a bit of a bust for Treasury, with receipts down 5.7% from last year and at the lowest levels in 5 years. We attribute that to the delayed realization of capital gains in 2016, with asset owners deferring sales ahead of anticipated tax changes this year. That also explains a bit of the slow US equity trading volume and low volatility of 2017 – those asset owners still don’t know what the new tax code may bring and may be continuing to defer sales.  Lastly, “Gig economy” tax receipts (not withheld, but paid directly by the worker) show this post-Financial Crisis labor market phenomenon is on the wane, down 5.5% in Q1 2017 after a 4.8% decline in Q4 2016.

April is to the US Treasury what Christmas is to retailers: the busiest and most profitable time of the year.  In 2016, for example, the Treasury’s Internal Revenue Service took in $193 billion in payments from individuals as a result of the usual April deadline for filing personal taxes.  By comparison the IRS took in only $15 billion in the month before and $12 billion the month after from taxpayers sending their remittances to the US government.

Last month, however, was not so good to the US Treasury. “Individual Income and Employment Taxes, Not Withheld” (the Treasury line item for receipts outside the customary withholding process) were down 5.7% year over year to $182 billion. Moreover, this is the lowest April haul since 2012. The April tax receipts of 2013 to 2016 ran between $193 billion (2014) to $219 billion (2015). This year’s receipt totals are far from those.

That should seem strange to you.  After all, virtually all asset prices have risen in the past 5 years.  Stocks, bonds, real estate… Everything is higher.  And when individuals sell those assets, they need to pay the capital gains tax as part of their annual April true-up with the US Government.

My explanation: asset owners are deferring sales while they wait for the details of Washington’s new tax plans. Why sell an asset (unless you have to) if you think the tax code might change in your favor?  Better to wait – especially if asset prices are in an uptrend – and see what develops.

I have been writing a lot about US equity market volatility this week, and it strikes me that this phenomenon might have a role in creating the current low-vol environment.  Since the details of the President’s proposals to change the tax code are still not public, asset owners may be continuing to defer sales in the hopes of better tax treatment down the road.  It is a sort of “Sellers’ strike”, where individuals with capital gains in equities are waiting for a new (and hopefully more capital-friendly) tax code before selling stock.

On the plus side of things, the same report we use for the tax receipt analysis (Treasury’s Daily Statement, https://www.fms.treas.gov/dts/index.html) shows that the US labor market is still humming along.  Looking at “Withheld Income and Employment Taxes” – the amounts deducted from employee paychecks every cycle – we see that April receipts were up 4.5% from last year and +3.7% on a three month rolling average.

Withheld tax receipts are a function of the number of people employed and wage levels, so a positive comparison shows underlying strength in the labor market.  Yes, there is a mix issue here.  The top 10% of wage earners may be taking most of the wage gains and therefore paying those to Treasury in their regular withholding.  Even still, the annual increases in withholding to Treasury have been remarkably stable (see attached charts in the PDF link above) at +4-10% since 2013, mirroring the growth in overall US employment.

Even as the overall US labor market has improved over the last year, one group seems to be left behind: those individuals who work in the “Gig economy”.  These workers pay Social Security/Medicare taxes just like those “Employed” by companies, but their remittances to Treasury tell a different story from the withholding data we described in the prior point.

For the first quarter of 2017, tax payments by self-employed/contract workers to Treasury were down 5.5%.  In Q4 2016, they were down 4.8%. Compare that to the growth in withholding/tax payments for payroll workers, and you see the problem.  One group is seeing growth in total wages (people employed times wages earned); the other is not.

Now, it could be that as the US economy has strengthened in the last year those previously in the “Gig” workforce have transitioned to traditional employment.  A few points here:

  • The Bureau of Labor Statistics has not done a study on “Gig economy” workers since 2005, so they are not much help in understanding the possible migration of workers between formal and “Gig” employment. Their work at that time showed “Contingent workers” represented 2-4% of the US labor force.  In addition, about 7% were “independent contractors”.  The BLS plans to update their findings with a study to take place this month.  Read the BLS piece here: https://www.bls.gov/careeroutlook/2016/article/what-is-the-gig-economy.h…
  • If workers are transitioning from “Gig” to traditional employment, they may still do occasional outside work as a means to augment their income and preserve their options; this trend should be visible in the BLS data. In fact, the number of Americans who report holding multiple jobs has started to rise in the last year. As of March 2017, 5.3% of the US workforce has more than one job, up from 5.0% a year ago. That is the highest reading since before the Financial Crisis.
  • Interest in typical “Gig Economy” jobs seems to be on the wane. Looking at the data from Google Trends, US searches for “Gig jobs”, “Uber driver”, “Delivery driver”, “Freelance work”, and “Online job” are all either flat or slightly down over the past year.
  • The one area of incremental interest: searches for “Work from home” were up 50% in 2016 from 2015.
  • McKinsey did an excellent study, published in October 2016, about the Gig economy in the US and Europe if that is a topic of interest for you: http://www.mckinsey.com/global-themes/employment-and-growth/independent-work-choice-necessity-and-the-gig-economy.

In summary, the tax data we’ve reviewed sheds some useful light on a few critical capital markets questions.  First, the US labor market is still strong. It is proving strong enough, in fact, to pull “Gig” workers back into the salaried labor force. Second, lower April tax payments highlight the possibility that asset owners are reluctant to sell appreciated assets such as stocks until they know the details of any revision to the tax code.  This will likely continue until either equities become more volatile or changes in the tax code are clearly on their way to becoming law.

While the tax data we’ve reviewed here is not typically part of the econometric toolbox used to analyze the US economy, it does provide an independent take on key issues. Who says there’s nothing good about taxes?

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