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  • Writer's pictureJoe Carson

Tax Data Offers Best Insight Into the Economic Crisis

Federal tax collections offer investors and policymakers the best insight into the suddenness and severity of the economic crisis. Federal withheld income collections are off nearly 10% in the last two weeks of March relative to the same period last year.

This abrupt plunge in tax collections reflects a sudden drop in employment, painting a much bleaker picture on the labor markets than what was seen in the ADP March employment report which showed a decline of only 27,000 jobs.

Unlike most economic reports federal withheld income tax collections are “hard” data as they reflect the money collected from a worker’s paycheck, every day of every month.

Daily tax collections are noisy and lumpy. A large number of companies pay workers on a bi-weekly basis and a smaller number on a weekly basis or at month-end. As a result, daily tax collections swell mid-month and at the end of the month so it's important to “smooth” the tax data over a number of days.

But the benefit of the tax data is that its “hard” (factual), not processed or adjusted by government statisticians or later revised when more companies report.

The daily tax collections during the last two weeks of March provide an early snapshot of the severity of job and income loss. The recent surge in unemployment claims indicate that tax collections in April will fall sharply relative to last year’s figures.

Tax collections over the next few months could easily fall 20% to 30% relative to last year figures. The scale of the decline will offer investors and policymakers insight into the actual severity of the job and income loss, far faster and also more accurate than other economic data series that rely on companies filling out government surveys.

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