The “Making Work Pay” tax credit went into effect in April 2009, and reduced withholding-tax receipts. To account for this, another data series was added to the database, and its tax numbers since that time are estimates of what receipts would have been without the credit. This makes it possible to produce two versions of each chart: one with raw data, and one with adjusted data.
Nobody knows by how much receipts were reduced by the tax credit. This data is not widely used as an economic indicator, so there is no government office with a team of economists performing analysis. Of course, the fact that the data is not widely studied is what gives it its edge.
The only commentary on the subject comes from the Congressional Budget Office in their “Monthly Budget Review” reports. And even there, there is no hard data, but only guesstimates. (See the excerpts from each report below.) In 2009, the CBO ranged from saying that 33%-50% of the year-over-year decline in withholdings could be attributed to the tax credit. Toward the end of 2009, they stopped even making the guesstimates. It really is anybody’s guess, so why don’t we settle on a figure of 40%?
(Note: The numbers used in the following examples are in thousands to simplify the calculations. For example, total receipts in July 2009 were $131.4 billion.)
Let’s use July 2009 as an example. Receipts were $131,416,000. In July 2008, receipts were $142,963,000. So, there was a $11,547,000 shortfall. If 40% of that were attributable to the tax credit, that number would be $4,618,000.80. And if we were to add that back to $131,416,000, we get $136,034,000.80.
Now, the withholding taxes are reported each business day, and that is how they are stored in the database. So, we want the daily numbers for July 2009 to add up to $136,034,000.80. We will therefore add a small amount to each daily number such that they add up correctly. That number is the percentage difference between the actual withholdings and our adjusted withholdings. So the calculation is:
If we add 3.514% to each number in April 2009, we should have an adjusted data series that is in the ballpark with the CBO’s guesstimates. But the payroll data is lumpy since the majority of paychecks go out on certain days of each month, and the calendar shifts from year-to-year, so let’s use a longer period: April-November 2009.
Withholding for April-November 2009 were: $1,028,483,000
Withholding for April-November 2008 were: $1,133,563,000
The shortfall was $105,080,000.
40% of the shortfall is $42,032,000.
The adjusted amount for April-November 2009 is $1,070,515,000.
And our daily-adjustment factor is:
So, the adjusted series in the database has been derived by increasing each daily amount reported by the Treasury since April 1, 2009 by 4.09%. Unless there is new legislation, the adjusted series will continue to be calculated this way until December 31, 2010, after which it will resume being identical with the reported numbers.
Congressional Budget Office commentary on withholding taxes since April 2009:
Report for April 2009 published on May 7, 2009:
“Compared with receipts in April 2008, withholding for income and payroll taxes fell about $14 billion (or 10 percent). CBO estimates that more than one-third of that decline is attributable to provisions of the recently enacted American Recovery and Reinvestment Act of 2009 (ARRA), most notably the Making Work Pay credit. Those provisions will continue to contribute to year-over-year declines in withholding for the next 11 months.”
Report for May 2009 published on June 4, 2009:
“Withheld income and payroll taxes fell by $16 billion (or 11 percent), primarily because of recent legislation and the effects of the recession. CBO estimates that more than one-third of the decline in withholding resulted from provisions in the American Recovery and Reinvestment Act of 2009 (ARRA), notably the Making Work Pay credit.”
Report for June 2009 published on July 8, 2009:
“Withholding for income and payroll taxes was about $13 billion (or 9 percent) less than that in June 2008. CBO estimates that more than half of the decline in withholding resulted from provisions in the American Recovery and Reinvestment Act of 2009 (ARRA), notably the Making Work Pay tax credit.”
Report for July 2009 published on August 6, 2009:
“Withholding for income and payroll taxes was about $11 billion (or 8 percent) less than that in July 2008, CBO estimates; about half of that decline resulted from provisions in ARRA, primarily the Making Work Pay tax credit.”
Report for August 2009 published on September 8, 2009:
“Withholding of income and payroll taxes fell by $99 billion (or 6 percent) compared with receipts in the same period of 2008, primarily because of the ongoing effects of the recession on wages and salaries and lower effective tax rates on that income. CBO estimates that about one-third of that decline is attributable to provisions in ARRA, primarily the Making Work Pay tax credit.”
Report for September 2009 published on October 7, 2009:
“Withholding of individual income and payroll taxes decreased by about $18 billion (or 13 percent), due in part to provisions in ARRA, primarily the Making Work Pay tax credit, and continued weakness in salaries and ages.”
Report for October 2009 published on November 6, 2009:
“Withheld taxes also fell, but not as much. Throughout the fiscal year, withholding of individual income and payroll taxes was lower than in the previous year, causing a total decrease in withholding of $117 billion (7 percent). The decline resulted from the weakened economy, small year-end bonuses, and tax reductions enacted in the American Recovery and Reinvestment Act of 2009 (ARRA).”
Report for November 2009 published on December 4, 2009:
“The weakness in withholding stems from a combination of the effects of recent legislation and the slow growth of wages.”
Report for December 2009 published on January 7, 2010:
“Withholding…receipts were about $13 billion (or 8 percent) lower than those in the prior year. More than half of that decline is attributable to provisions of the American Recovery and Reinvestment Act of 2009 (ARRA) and the effects of the calendar (there was an additional Monday in December 2009, as compared with December 2008).”
Report for January 2010 published on February 4, 2010:
“Withheld individual income and payroll taxes declined by $11 billion (or 7 percent). About one-third of that decline is attributable to provisions of the American Recovery and Reinvestment Act of 2009 (ARRA).”
Report for February 2010 published on March 4, 2010:
“…withheld income and payroll taxes declined by about $3 billion (or 2 percent); excluding the effects of recently enacted legislation, withheld taxes were virtually unchanged from February 2009.”
Report for March 2010 published on April 7, 2010:
“Provisions of the American Recovery and Reinvestment Act (ARRA) reduced receipts in March 2010 relative to receipts last year, partially offsetting the increase from the extra business day this year.”
Report for April 2010 published on May 7, 2010
“Receipts in March and April suggest that tax revenues may soon begin to rise again. In the past two months, withheld income and payroll taxes have been greater than in the same months last year, presumably reflecting a rebound in wages and salaries and a much smaller impact from the Making Work Pay credit.”
In the quote above, CBO mentions a “much smaller impact”, however they don’t say why. The withholding tables were adjusted in January (see the notes at the bottom of this page), but no further changes had been made at the time of the CBO report.
Report for May 2010 published on June 4, 2010
The CBO did not mention the Making Work Pay tax-credit in this report. They focus on year-over-year changes, and the tax-credit was in effect last May, so perhaps that is why they didn’t mention it.
Report for June 2010 published on July 7, 2010
Report for July 2010 published on August 5, 2010
The CBO did not mention the Making Work Pay tax-credit in the last three reports though it is still in effect.
These CBO reports are released sometime during the first week of each month, and are listed on this page.
The Heritage Foundation has some criticism in “Making Work Pay Credit Will Not Stimulate the Economy“.
The IRS has information on Making Work Pay on this page.
The full text of the legislation can be found on this page at the Library of Congress.
Since the tax credit began reducing withholdings in April 2009, apples-to-apples, year-over-year comparisons can be made starting with the April 2010 data. However, the tax credit is still in effect and withholdings will still be lower than normal until 2011. So, in January we should see a jump back up after the tax credit expires – unless Congress extends it.