2/8/2007 – What Tax Receipts are Telling Us

As we commented in our letter that accompanied our client’s performance reports economic data during the past year has been mixed and at times contradictory. If you are bullish, there is plenty of positive data; if you are bearish, there is plenty of negative data. We find it is useful to look at tax data to break the tie – clearly nobody pays more taxes than they have to. The message here is that the economy is strong. Tax receipts were up 11.8% in fiscal year 2006 (FY06) on top of FY05’s 14.6% increase. Receipts have grown another 8% percent so far in FY07. At the same time, however, state sales tax collections have been weak. So even the tax data has contradictions! 

Our interpretation of these facts is that the housing recession is being reflected in more modest consumer spending (for middle class and low-income America) but its negative effects are contained and have not spread to the broader economy. This environment is bullish for companies focused on high-income customers and companies with substantial overseas business.