Please see our introductory pages on payroll tax receipts for some background information on this data series.

Analyzing the Potential for Tax Receipts Growth in 2012

Note: In all that follows, "Tax Receipts" and "Tax Deposits" refer to payments deposited by employers on the basis of payroll activity, and received by the US Treasury . The deposits consist of income tax withheld from employees, plus payroll taxes (i.e. Social Security and Medicare contributions made by both the employer and employees.) We analyze the Daily Treasury Statements and, despite any appearance to the contrary in the Treasury’s Monthly Statements, these two taxes cannot be separately identified at the time deposits are received.

Overview

The year-to-year change in tax receipts - as is to be expected -  jumped up as we moved into 2012. (See charts below.)

Using the 2011 and 2012 tax-rate structures together with broad assumptions about the working population, we have modeled expected tax growth rates for different scenarios of earnings and jobs growth.   In one scenario, based on the average earnings and jobs growth estimated by the Bureau of Labor Statistics for the twelve months to January 2012, our  model predicts a corresponding year-over-year tax receipt growth rate of between 4% and 5%.

For the four weeks to February 9th, 2012, however, we see an actual year-over-year growth in tax receipts of 3.0%.  Since we are in the midst of bonus season, which our model does not cover, we cannot yet draw a clear comparison between what would be expected from BLS reported employment growth and what currently is observed.  Clarification must wait until April, and the end of bonus season.

As pointed out in the last review in December, the annual bonus season masks the impact of regular payroll earnings on tax receipts. To make this clearer, the charts have been modified so as to highlight in different colors the periods when bonus effects are present.

Another Note on Calendar Effects

Due to the pattern of December and January national holidays this year, our proprietary series of "standardized" four-week periods has more gaps than usual.   We again urge readers to pay no attention to simple calendar-month year-to-year comparisons of the raw Treasury data.  See the introductory pages on payroll tax receipts and the last review of December, 22nd for an explanation of this.

Tax Growth Scenarios

If we look at the chart of year-over-year growth in tax deposits, we can see step jumps at the beginning of each calendar year.  Although bonuses vary from year to year and have some transient effect on these charts, the more important issue is the change to the IRS income tax bands, allowances and credits, and how they interact with wage rises. Also, in 2011 the introduction of FICA payroll tax "holiday" was a large factor.

For individual employees, given wage growth, tax filing status, deductions and allowances, the percentage change in the tax deposits associated with their employment can be calculated.  With no typical or average employee, however, the tax change over the whole working population cannot be calculated similarly.

Nonetheless, because of a convexity in the income tax curves, we have found that the percentage change in tax for certain percentage changes in income is remarkably similar across a wide range of taxable incomes. In addition, although the ratio of withheld income tax to payroll taxes (Social Security and Medicare) varies hugely with income, we an use the fact that for the total population, both sets of taxes (which are added together in the deposits we are analyzing) are roughly equal in size.

The table below shows the simple estimates for what year-over-year tax growth could be for various combinations of across-the-board growth in wages and job numbers.   These numbers have been calculated with the 2% payroll tax still in place.  If this tax "holiday" had not continued past February (Congress this week agreed on such a continuation) we would have added roughly another 6.7% to all of these estimates.

The ± ranges are our estimate of uncertainties about how different workers’ income tax would change, depending on their circumstances. 

Estimates of 2012 Year-over-Year Tax Deposit (%) Growth (Not applicable to years other than 2012)
Wage Growth* (Yr/Yr %)	Growth in Number of Jobs (Yr/Yr %)	Growth in 4-Week Tax Deposits (Yr/Yr %)
2.0	1.0	3.0 ± 0.2
2.0	1.5	3.5 ± 0.2
2.0	2.0	4.0 ± 0.2
2.5	1.0	4.0 ± 0.4
2.5	1.5	4.5 ± 0.4
2.5	2.0	5.0 ± 0.4
3.0	1.0	4.8 ± 0.5
3.0	1.5	5.3 ± 0.5
3.0	2.0	5.8 ± 0.5
(*) This is actual, not inflation-adjusted wage growth. The IRS raised all tax bands in 2012 by 2.46%,  the average CPI inflation in the twelve months to August 2011. The official CPI-U measure in December 2011 showed a 3.0% year-over-year increase.

 

Note that for the twelve months to mid-January, the Bureau of Labor Statistics reported total job growth of 1.5% and that average weekly earnings grew by 2.5% (in the private sector).  This would put us in the 4.5% ± 0.4% range of tax growth (if applied uniformly as per the model, and extended to government and farm workers).

In the four weeks to February 9th, however, the observed year-over-year growth in tax deposits was 3.0%.  This period will include some bonuses which are not accounted for in the model.  So, we must really wait until their effect is over, in April, for a complete assessment.  At this same date last year, though, tax growth was close to the level (about 1.5%) that appeared after the bonus season of 2011. This has occurred in other years past, when large swings in employment have not clouded the picture. This may be because early-February represents a pause between the two bonus "peaks" of December and March.

CAVEAT:  This analysis makes a number of assumptions about averages of distributions which may not be justified.  For example, although we may have an average earnings growth, it is may not be a good approximation to apportion this, as we have done here, across all employees.  Thus, these numbers should really be placed in the context of trying to explain the kind of large jump in tax receipts we are seeing, and which we may see more of, rather than as an accurate tool for deducing underlying payroll growth.

(Note:  We could not do a similar analysis In 2011 because the dropping of the Making Work Pay credit made the ranges on the tax growth estimates too wide, as tax-payers differed widely in how this change affected their overall tax as a percentage.)