(Originally published here.)
Tax day is almost here, which makes this a good time to look at what the U.S. Treasury’s daily tax data tell us about the state of the economy. When the private sector is doing well, the government ends up taking in more money, as it is now. During recessions, fewer people are earning incomes and collecting capital gains, so tax revenue falls.
Making sense of the numbers takes some effort. The government collects taxes every business day but the distribution is very uneven during the course of the year, or even during a single month.
I started by adding up all the income and payroll taxes withheld each month starting in January 1993. Of course, every month has a different number of working days based on the timing of weekends and holiday, so I adjusted the raw numbers by the relative length of each month. That led to this:
One finding: the government tends to withhold a lot more taxes in the winter months than it does the rest of the year, perhaps because of year-end bonus payments. Tax withholding in March (the last full month for which we have data) is normally about 5 percent lower than in February. This pattern no longer holds.
Tax increases at the beginning of 2013 explain only some of this change. To avoid paying higher tax rates on bonuses, dividends and capital gains, many people and businesses shifted income from the beginning of 2013 to the end of 2012. This depressed the normally high level of income tax collected in January and February. Nothing like that happened this year, however, which suggests the underlying strength of the private sector may be responsible for the uptick. To clear out the noise, let’s look at the income and payroll taxes withheld in each March since 1993, adjusted by the number of business days in each month.
Higher tax rates explain the big jump from March 2012 to March 2013, but what could have caused such a large gain in the taxes collected in the month just ended other than an improving economy?
The longer view makes it clear that tax revenue is growing faster than it has in 20 years (unadjusted for inflation) despite the fact that the initial impact of higher tax rates has already dissipated.
The most plausible interpretation is that the economy is generating more income at an increasingly brisk pace. For a country where millions of people are still unemployed and many people feel incapable of retiring, that’s welcome news.
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