Each business day, the United States Treasury Department publishes a report on the workings of the government’s income and spending. One of the items on this report is the “Withheld Income and Employment Taxes.” (Here in the USA, workers have taxes automatically deducted from each paycheck.)
Using these tax collections, we can get a real-time feel for how well the economy is doing every business-day. Other data, such as unemployment claims, jobs-creation, etc. are only published weekly or monthly. This data is also not seasonally adjusted, estimated, or massaged in any way. The Treasury simply reports how much money they collected.
Data on jobs also do not tell us much about the quality of the jobs. Is it a good thing if three new jobs were created? Maybe, but what if one highly-paid worker was fired, and four minimum-wage workers were hired? Is the economy doing well, or not? In such a circumstance, it is entirely possible that the five workers involved have lower combined income. The tax data gives us a better insight because it gives us a read on the grand total of all employment in the economy.
This data is also not widely followed. Economists don’t like simple bean-counting. They would rather perform exotic calculations using elaborate models, surveys, and analysis. That’s their job security. So, while this data gives a far superior insight into the economy, it will likely maintain its low-profile, and edge, indefinitely because economists will continue to tell their bosses that much more elaborate analysis is required.
Tax data is the ultimate “hard data” but it does come with considerations – especially when tax rates change. If tax collections go up or down, was it due to the economy, or the rate-change? In April 2009, a payroll-tax credit went into effect to help combat the recession. We discuss it on this page.
However, from a higher-altitude perspective, tax-rate changes do not substantially alter the long-term trend of tax collections. In a recession, when employers are doing mass layoffs, tax collections are going to fall no matter what the tax rate is. And when the economy is expanding, tax collections will rise as hundreds of thousands of jobs are created each month. In other words, it is very difficult, maybe impossible, for tax rates to put a dent in our year-over-year growth rate charts such as this one.
Notes
All of the charts and numbers here are nominal dollars. We may add an inflation-adjusted data series in the future, though inflation has not been a large factor since this data series began.
The government publishes this data promptly at 4pm Eastern time each business day – the same time that the stock market closes in New York City. At that time, we plug-in the new number, and all the charts update.
This data does not include taxes collected from self-employed workers. However, the ranks of the self-employed are still very small compared to clock-punchers, so that data can be ignored for our purposes here.
During 2001, and then again in 2003, there were payroll tax cuts to help boost the economy. We have not adjusted the data to account for those cuts. However, it looks like the majority of the plunge in withholdings in 2000 and 2001 happened before the tax cuts went into affect:
Economic Growth and Tax Relief Reconciliation Act of 2001.
Jobs and Growth Tax Relief Reconciliation Act of 2003
Withholding Tax Tables
Tables Published in March 2009 – these were the tables released by the IRS to implement the “Making Work Pay” tax cut.
Tables Published in November 2009 – these are the tables for 2010.
- The “Making Work Pay” tax cut is still in force for 2010, but withholdings need to be higher (per check) because the cut did not begin until April 2009. The cut is spread over 12 months this year instead of 9 like last year, so that reduces the tax break workers will see in each paycheck.
- Lower threshold – if you compare the “single person weekly” tables as an example, you will see that the threshold for withholding has been reduced from $138 in 2009 to $116 in 2010. So that will increase collections also. However, the Congressional Budget Office made no mention of it in their report on February 4, 2010, so perhaps the amounts are not significant.
- More brackets – Each table now has 9 income brackets compared to the 7 brackets used in 2009. The IRS did not provide an explanation, however it doesn’t look like the new brackets will have an impact upon collections.
- Links – This politically-biased writer thinks the new tables will substantially increase collections. This writer did some calculations and could not find anything nefarious.
The IRS doesn’t seem to keep older withholding tax tables on its website. If you know where to find them, please post a comment.
Withholding and Unemployment Benefits
You may have seen somebody arguing that withholding taxes are going up or down because of unemployment benefits. While unemployment benefits are taxable, withholding is not automatic. Recipients have to file a Form W-4V “Voluntary Withholding Request”. The IRS has not published any statistics (that we are aware of) on how many W-4V’s are filed, but it is probably a safe bet that most people do not file the form. They will still have to pay the taxes in April on their annual tax return, but those taxes would not be reported in the withholding data.
Also, when somebody loses a job, withholding taxes cannot go up because of unemployment benefits. If a worker is making $1,000 a week, loses his job, and then is collecting $293 a week (the national average) in unemployment, it stands to reason that withholding taxes can only go down.
Fluctuations in payments due to political wrangling about how long benefits should be paid likely have a negligible effect on withholding tax collections. Most people probably don’t have it deducted at all, and the tax on $293 is only about $20 (as of this writing). So, suppose that there are a million more people added to the unemployment program due to a new bill passed by Congress. Even if all of them have taxes withheld, it would only amount to about $20 million per week in withholding-tax collections, which is a small percentage of the billions that the Treasury normally collects each week.
The US workforce is very large – even during the worst of recessions. Aside from tax-rate changes implemented by Congress, and inflation, there are simply no other factors large enough to put a dent in the withholding tax data.