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Economy in Brief

The Employment Data And Tax Receipts Don't Compute
by Joseph G. Carson ([email protected])  October 19, 2020

The employment data and tax receipts don't compute. In September, the US Treasury reported that gross federal income tax receipts fell 19% versus year-ago levels. That represents the sharpest year-on-year decline since May, or when parts of the economy started to re-open. It also far exceeds the 15.4% decline reported for August.

The weakness in September tax receipts is most puzzling. That's because the cumulative reported gains in payroll and household employment in recent months should result in more tax receipts, not less.

Also, September 2020 had 21 workdays versus 20 in 2019. So the benefit of an extra day should have produced additional tax revenue and a smaller year on year decline compared to what occurred in the prior month.

There are a few possible explanations for the variance between the employment data and tax receipts.

The employment data may be flawed. The Bureau of Labor Statistics (BLS) has noted that the number of people surveyed for the household employment measure and the collection rates from business establishments to estimate payroll employment have been well below average during the pandemic. Potential errors could exist in the reported employment levels, and how many hours people are working as well as how much they are getting paid.

The final payroll job count is based on the Quarterly Census of Employment and Wages (QCEW) report. The QCEW data are based on quarterly tax filings from over 10 million business establishments. So it is hard data and BLS says it covers approximately 97% of civilian workers. However, the report for Q3 will not be released until February 2021. So an accurate record of employment and wages will not be known for several months.

Perhaps there are flaws or holes in the tax data. The Treasury Department could be lumping tax receipts in the wrong tax bucket. That has never happened before, so the odds of a misclassification error are near zero.

Another explanation is that companies are not withholding employee tax payments, as there is confusion over the implementation and the “forgiveness” of payroll costs associated with the Paycheck Program Loan Program (PPLP). According to guidelines of PPLP, companies are allowed to defer “payroll taxes” until December 31, but not employee income tax payments. Is it possible that small firms are deferring paying both types of taxes?

The amount of payroll costs eligible for loan forgiveness includes the federal income tax imposed on an employee and are required to be withheld by the employer. Is it possible that companies think that since all payroll costs could be forgivable they are not withholding the federal income tax from worker’s paychecks?

Of the two possible explanations, flaws in the employment or tax data, unpaid taxes would have far greater implications for the economy than a miscalculation of a month or two of job and wage gains. That's because the combination of small firms faced with paying deferred payroll taxes in early 2021 and workers faced with unpaid withheld income tax bills would drain liquidity and cash flow positions, dampening spending and overall economic growth in the process.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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