Overview of Payroll Tax Receipts

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2010 4th Quarter Growth

    2010 Year-end Bonuses (Paid and Deferred)
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2010 4th Quarter Growth

The pattern of tax receipt growth seem to imply a steady increase in total earnings.

Note that the acceleraton in year-year growth seems to stop in the 4th quarter.  Remember: This is a growth chart, so a flat line at a positive level means growth in tax receipts. (The data points in the two red circles are, we believe, artifacts of the Thanksgiving holiday. )

But, remember also that we are looking here at the year-year or 12-month change.  This depends not only on how earnings and tax are growing at a particular time in 2010 but also what changes were happening at the same time in 2009. 

It is not possible for us to produce a monthly-change chart (yet).  However, it is clear that:

• Earnings and tax were falling in the first three quarters of 2009, but that a turnaround started at about the start of Q4 2009.
• Thus in the 2nd and 3rd quarters of 2010, tax receipts were being compared with a falling picture 12 months prior, but when Q4 2010 is reached the comparison is between two growing periods.

So, a flattening off in the growth curve, to a steady 6% year-year, does not imply a slowing in monthly growth. 

WARNING:  The earnings growth we are talking about is not the same as growth in the number of jobs. Nor is it necessarily the growth in total weekly earnings as estimated by the BLS: Because people at different earnings levels pay different amounts of tax, there is a complex weighted averaging going on.  See our note Analysis of Payroll Receipts for a discussion of income distribution effects.

End of Year Bonuses 2010 - A 15% Rise?

If we compare the spikes in payroll tax receipts at the end of 2009 and 2010 (see chart below) we get amounts of roughly $33bn and $38bn respectively.  A 15% increase. (The chart shows the deposits in a set of rollling 4-week periods,  but we assume that all of the year-end bonus tax will have been collected in the a single 4-week period, the one with the highest dollar amount.)

What does this tell us about the level of bonuses in 2010 compared with 2009?

Well, a 15% increase in tax does not mean that bonus payments increased by the same amount.  Here’s why -

The amount of  tax changes because:

•  The number of people receiving bonuses changes.
•  An individual’s bonus can change by X% but that can imply a signifcantly different percentage change in the tax. And this will depend on every individual’s position in the tax schedule brackets.

However, let’s make a few sweeping but reasonable assumptions and see what happens:

1. Suppose that the set of people receiving bonuses for 2010 is roughly the same as those who received one in 2009.
2. Suppose that their regular salary and bonus for 2010 takes their bonus within the same tax bracket as they found themselves in in 2009.
3. Everyone enjoyed roughly the same % increase in their bonus.

Under these circumstances, the change in tax payable on the bonus IS proportional to the change in the bonus.  Thus we can say (in this scenario) that everyone’s bonus went up by 15% last year (2010).

Now to get a non-proportional result, we would have to see bonuses moving people in between different tax brackets, and or people at different income levels receiving markedly different increases in bonus.  Or, we would need to see a big change in the number of workers receiving a bonus from one year to another.

So, no definite numerical result is available, but it seems fair to say that total bonus payments have seen a healthy rise for year end 2010. 

But that’s just the bonuses paid in December.

Deferred 2010 Bonuses

Empioyers running on an accrual accounting basis can choose to straddle the tax year by committing to bonuses before the end of 2010, but paying them in 2011 before mid-March.    We will see a second spike in tax receipts begin to ramp up in January, peaking mid-March.

Given both the uncertainty over the retention by Congress of the exisitng tax brackets, plus the 2% reduction in FICA next year, it will be interesting to see if the relative amount of March/December payments changes compared with the previous year.  

We shall see.