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Do Accelerated Tax Refunds Explain Year-To-Date Consumer Strength And Record Low Government Tax Withholdings?

Tyler Durden's picture




 

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.

 

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Thu, 03/04/2010 - 00:28 | 253291 Hephasteus
Hephasteus's picture

Interesting. I made this connection when the downturn hit. That there would be some funding occuring at corporate  and self employed level from tax refunds which can go across 3 years. So they seem more prone to take a loss and clawback payments this year than last. Which means losses grew this year over last or at the very least at corporate level volunteering to report loss.

Thu, 03/04/2010 - 00:37 | 253301 glenlloyd
glenlloyd's picture

Reasonable argument. With tax preparers now fronting a portion of refunds prior to W2 receipt people are taking the early money and spending. I know at least five individuals who have gone this route and one specifically mentioned Christmas spending as a reason for it.

It would / could also help to explain some of the boost in automobile sales. This time of the year especially, people buy cars because it's that rare moment when they have a lump sum of money that during the rest of the year they never have. Combine it with some nominal savings rate decline and voila, you have a car down payment and financing for 72 months on something that won't last three years.

Thu, 03/04/2010 - 09:58 | 253490 Cognitive Dissonance
Cognitive Dissonance's picture

I have an extended family in multiple states and I do the taxes for nearly all of them. I've noticed this year that the IRS is pushing out refunds faster than ever. In some cases, the refunds were direct deposited into a bank account within 5 days of my pushing the button to file electronically. Last year it was a minimum of 10 days and usually 15 or more. Last year it appeared the Treasury was only sending out (electronic) refunds Thursday night/Friday morning. But refunds are now coming in Monday and Tuesday as well.

For two family members who opted for checks, they received them within 3 weeks of the return being electronically filed. I've never witnessed this fast a turn around. Either the IRS systems are getting faster in one year (a distinct possibility) or the IRS has marching orders to refund money claimed and then ask questions. Or maybe it's both.

Thu, 03/04/2010 - 10:04 | 253496 Anonymous
Anonymous's picture

To go along with that - I filed my taxes early as usual knowing I would be getting a refund, and got the typical "it'll take 3-4 weeks" response from my tax preparer, which is about right for when I got my refund in previous years. This year, I got my refund in less than 7 working days. Nor did I do direct deposit this year like I had last year, so I'm sure if I had done that it would have been faster. So 7 working days WITH a check request.

Thu, 03/04/2010 - 11:18 | 253573 OBRon
OBRon's picture

Combine in the fact that those laid off in the past year were having taxes, when they still had jobs, withheld at a greater rate than what their ultimate tax obligation turned out to be - due to reduced income since their layoffs.

Which would mean refund amounts should increase from all the millions of additional unemployed.  And considering they are likely short of cash about this time of year, they likely filed as early as possible to get badly needed $$$ for basic consumables.  Hence the "pop" in post X-mas sales.

Of course, when it comes to "same-store sales", closings of competitors and thinning of nearby non-performing stores will cause surviving stores to show a cannibalization pop as well.

But, of course, the "All-is-well" cheerleader crowd at cnbc don't ever mention that, do they???

lol

Thu, 03/04/2010 - 00:38 | 253303 fuu
fuu's picture

Excellent reporting. Thank you!

Thu, 03/04/2010 - 00:39 | 253305 HarryWanger
HarryWanger's picture

Hey, where is everyone? Look at this from Bloomberg: "Greece Aid Plea Snubbed by Germany in ‘Historic Moment’ for EU"

Thu, 03/04/2010 - 00:57 | 253317 perchprism
perchprism's picture

 

Check out what from Bloomberg?   Oh, here's the link you forgot:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aCPneYIYi0Vs&pos=1

 

Thu, 03/04/2010 - 01:00 | 253319 HarryWanger
HarryWanger's picture

Thanks, perch.

Thu, 03/04/2010 - 01:54 | 253338 perchprism
perchprism's picture

 

You know, this is a day old, the Bloomberg hacks ginned it up with an eye-catching "...Historic Moment for EU", but really, Merkel said yesterday that Germany's Friday meeting with Popandreau(sp?) would not be to discuss any bailout.

Thu, 03/04/2010 - 00:48 | 253312 Anonymous
Anonymous's picture

One of the most common refund we have seen is to claim head of the household for dependents that do not live in the household at the same time adjusting the income to meet the max refund on earned income credit.We call it the poor man's bailout.We have seen a lot!!!! of this in this year's tax prep.

Thu, 03/04/2010 - 01:18 | 253322 Oracle of Kypseli
Oracle of Kypseli's picture

This frontloading will create the void down the road, as the physics law of connected vessels. Soon, they will run out of bullets.

There are rumors that the Fed has ordered 30 helicopters and has leasing options on another 30. The plan is to throw money out of helicopters in 60 US cities simultaneously.

Thu, 03/04/2010 - 01:19 | 253323 Anonymous
Anonymous's picture

Million not paying their mortgage, hmmm

Thu, 03/04/2010 - 01:22 | 253324 digalert
digalert's picture

"Kolifornia" is suspending refunds for IOU's again.

 

Thu, 03/04/2010 - 01:23 | 253326 Anonymous
Anonymous's picture

wtf? that article is from over a year ago

Thu, 03/04/2010 - 02:45 | 253358 Hephasteus
Hephasteus's picture

The computer industries started layoffs again. IBM is down under 400k employees. They couldn't even field a good army right now.

Thu, 03/04/2010 - 07:44 | 253431 Ned Zeppelin
Ned Zeppelin's picture

E. Colifornia

Thu, 03/04/2010 - 09:18 | 253471 deadhead
deadhead's picture

oh, that was good...very, very clever Ned!

Thu, 03/04/2010 - 10:23 | 253505 blindfaith
blindfaith's picture

Hummm, I think that is what you would call "Californication"!

And, lets not forget the unfunded pension funds that are about to come waterfalling down on California and th erest of the nation.
Guess we are in the mess together, cumbia!

good story here:
http://www.washingtontimes.com/news/2010/feb/26/our-own-greek-tragedy/

Thu, 03/04/2010 - 01:39 | 253329 Anonymous
Anonymous's picture

I will bet a big chuck of the loss is also coming from HNWI's ("high net worth individuals") that have made a conscious decision to play the one remaining loophole available to them in the tax code - drumroll please - no income = no taxes paid. I really like that one, perfectly legal and available to all - unfortunately I'm not there yet....

If you have 30mil plus and are up in the 50-60 age bracket some quick math on the napkin says - f-it, no more vc, hedge fund risk/stock/bond risk, we already have the houses and toys, the world is scary, so we sit in cash, treasuries, pm's and just spend down some of the principal and push out that new Rolls Phantom purchase a year or two. With no risk and no taxes, it leaves a lot of time (and money) available for shopping, golf, travel, grandkids and weekends at the yacht club. Not as much as before, but were in a recession you know - we've got to tighten things up a bit. No more couture for misses - off the rack baby....

Thu, 03/04/2010 - 01:51 | 253336 Anonymous
Anonymous's picture

.

I live North of California in tax increase happy Oregon.
As soon as I read about Cali's IOU refunds, the
first thing I did was claim 3 dependents on taxes
withheld from every paycheck.

I'll stay in the game -for now. But I'll be damned if I'll
loan the IRS my hard earned money all year. I'm happy to
write an annual paper check to the Gub -while I quietly prepare. Collection vs withholding on the grand scale
is easy to explain. Good money drives out bad money.

We all know the system is broke...

.

Thu, 03/04/2010 - 02:31 | 253351 Shiznit Diggity
Shiznit Diggity's picture

Recent consumer strength may be at least partly attributable to "squatter stimulus" (extra disposable income derived from occupying your home rent free while awaiting foreclosure).

Thu, 03/04/2010 - 03:56 | 253382 dark pools of soros
dark pools of soros's picture

problem with that theory is that most places where the foreclosures are backed up enough to accrue much wealth from squatting do no have a good job market by definition.  So there may be a few, but most are squatting since they have no job.

 

The places where there are still good job markets, you won't be able to squat very long since there aren't as many foreclosures....

 

now, if you know your bank is a total fuckup, then sure, give it a try anywhere and do the whole, "I need to see the deed, etc paper work" trick to see if you can stall them as long as possible

Thu, 03/04/2010 - 03:09 | 253366 faustian bargain
faustian bargain's picture

...and as Jack Nicholson said, "What if this is as good as it gets?"

Thu, 03/04/2010 - 04:34 | 253392 Hephasteus
Hephasteus's picture

Today is the worst day since yesterday. Rinse and repeat all year.

Thu, 03/04/2010 - 04:36 | 253394 Bear
Bear's picture

Hopefully

Thu, 03/04/2010 - 08:05 | 253437 Jeff Lebowski
Jeff Lebowski's picture

So I was sitting in my cubicle today, and I realized, ever since I started working, every single day of my life has been worse than the day before it. So that means that every single day that you see me, that's on the worst day of my life.

   What about today? Is today the worst day of your life?

Yeah.

   Wow, that's messed up.

Thu, 03/04/2010 - 11:07 | 253552 viahj
viahj's picture

What would you do with a million dollars?

   Besides two chicks at the same time?

Thu, 03/04/2010 - 04:39 | 253395 Anonymous
Anonymous's picture

Not to mention that the last couple of years the Feds have been paying out a lot of the built-up AMT credits that people had been amassing over the years ....

Thu, 03/04/2010 - 04:51 | 253398 Tapeworm
Tapeworm's picture

Not consumer oriented, but hey!

I'll do the last chance at the accelerated depreciation of capital equipment purchases just to avoid giving my ass busted profit for the year to the maggot class.

 I don't need any new machine tools but having another is better than having a tax paid receipt.

Thu, 03/04/2010 - 06:54 | 253419 sangell
sangell's picture

I read that tax filings are running behind last year. People are struggling with how to deal with unemployment benefits amongst other complications and thus the refund side of things might be coming to an abrupt end and more people discover they are on the wrong side of the IRS.

Thu, 03/04/2010 - 07:32 | 253427 Crime of the Century
Crime of the Century's picture

Anyone living in the Northeast who paid attention to the Farmer's Almanac (or any sane meteorologist), and conversely ignored NOAA/GISS, knew this winter was going to kick tail like last winter. I took advantage of the woodstove rebate, many finally broke down and put decent windows in. A whole lot of $1500 fattened returns were disbursed I would guess. Unlike other gimmicks, this was a straight up bag of money from Uncle. I'd imagine that anyone taking advantage probably filed with record speed this year.

Thu, 03/04/2010 - 07:34 | 253428 Anonymous
Anonymous's picture

Bullish news on the State budgets and Citigroup front.

Citigroup’s Auction-Rate Bonds Freeze $1 Billion in Hawaii Cash

http://www.bloomberg.com/apps/news?pid=20601109&sid=apWF4xr_CRUY&pos=10

March 4 (Bloomberg) -- Two years after the auction-rate bond market froze, Hawaii has lost about $250 million in market value on $1 billion in student-loan securities sold by a single Citigroup Inc. broker as a cash substitute that the state has had difficulty unloading.

Thu, 03/04/2010 - 07:35 | 253429 alexdg
alexdg's picture

Bullish news on the State Budget and Citigroup front: 

http://www.bloomberg.com/apps/news?pid=20601109&sid=apWF4xr_CRUY&pos=10

March 4 (Bloomberg) -- Two years after the auction-rate bond market froze, Hawaii has lost about $250 million in market value on $1 billion in student-loan securities sold by a single Citigroup Inc. broker as a cash substitute that the state has had difficulty unloading.

Thu, 03/04/2010 - 07:46 | 253432 Anonymous
Anonymous's picture

The US Government is destroying the "Homeland" as it fights wars for the oil industry worldwide.

Thu, 03/04/2010 - 09:18 | 253470 Anonymous
Anonymous's picture

Why should I buy precious metals at the current prices? Don't I risk losing savings if the price drops? How does the precious metals saver justify this?

Thu, 03/04/2010 - 10:41 | 253524 blindfaith
blindfaith's picture

If you want a real eye opener, then go rent "FOOD, INC." the movie. You want to see how "our generation" has funded via our 401K, etc., the machinery to destroy our food, health, banks, insurance, politians, the nation... the whole show, lock, stock and barrel. The paid corruption...the lawyers, paid thugs, paid politians, the Supreme Court, FDA, USDA and every watch dog department of government is paid to do nothing and keep you stupid and frustrated with "we're trying to do something but it takes time". You WILL BE owned by the company store because the company store is the government. Boiled frogs anyone? We ARE the food, think about that when you watch the movie and all becomes very clear. There is no way out, not now. Blindfaith is not a cure, but we are sold that everyday.

Thu, 03/04/2010 - 11:26 | 253585 Anonymous
Anonymous's picture

Food Inc is a must watch along with "Fresh"
Our "retreat" is actually a pasture based farm
and we are finding that pasture based products are very much
in demand
The food we buy in stores, including so called organic, is crap.Eat a real pastured Hen egg and you will never be able
to eat a store bought egg again. Same with real grass fed
beef. Beware of the organic label, its been hijacked

As far as the the thread goes, no doubt the ATR's increase
consumer spending. But retail sales tax revenues are down
YOY for the past two years. So more Gov't lies.
Millions of folks not paying mortgages are contributing too
along with folks who will default on CCs

Fri, 04/16/2010 - 09:08 | 303725 mark456
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