Are Federal Withholding Taxes Rising or Falling?

by: Wildebeest

In March blogger Matt Trivisonno wrote an article titled "Payroll Withholding Taxes Surge in March", which was published at The Big Picture. Somewhat strangely, the figure that accompanied the blog actually showed continued decline in tax revenues. Sure there was a rise in the line on the chart but the rise indicated that revenues were less negative, it didn't indicate positive year-on-year (YOY) growth. Those sort of charts represent a continued source of irritation for me as described here:


So while there has been a YOY increase in withholding taxes in March (see below) the chart accompanying the article showed the opposite.

Zero Hedge ran an article on April 7 titles "Now, About This Alleged Increase In Tax Withholdings By The Government..." which began:

We are a little confused by all the recent hype in the media about a surge in individual tax withholdings by the US Treasury. Our confusion is predicated primarily by the fact that this is patently not true. (their emphasis)

There was no indication in the Zero Hedge article that they were taking a shot at anyone in particular. And there have been several "taxes are rising" type stories recently.

Whether Zero Hedge had Trivisonno in its cross hairs who knows, but Trivisonno decided to rebut the Zero Hedge article, with a rebuttal titled "Zero Edge-- Rebutting Faulty Tax Analysis", which led Zero Hedge to respond with "Some Afternoon Confusion". Both Zero Hedge and Matt Trivisonno claim to get their numbers from the daily U.S. Treasury statements which are available here. So are taxes rising or falling YOY?

Trivisonno says in his rebuttal that

The purpose of looking at the withholding data is to try and get an idea of how many paychecks are being cut, not to make an accounting of the federal government's cash flow.

So presumably a study of the daily receipts could be used as a proxy to forecast employment changes ahead of the monthly BLS official figures (or other releases such as ADP).

Since the debate seems to be about Q1 receipts in 2010 versus 2009 I've taken the monthly Treasury data, specifically data from Table 4 of the monthly Treasury statements (for anyone interested in reproducing this). The first chart shows federal income tax withheld -- this is the first line item in Table 4 of the monthly release.

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Clearly there is a rise in income tax receipts. The next chart shows total tax withheld, i.e. income taxes plus social security and Medicare taxes. Note that this next chart excludes the 3rd "Individual Income Taxes" line item called "other." March 2010 receipts exceed March 2009.

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When you add the "other" item the story is much the same: (Click to enlarge)

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A criticism Trivisonno had of the Zero Hedge analysis was that new tax changes took effect in April 2009:

And since Zero Hedge did not take into consideration the tax-credit that began in April 2009, their unadjusted numbers understate withholdings for the first three months of this year by a substantial amount.

On that basis Trivisonno believes that adjustments are necessary to the 2010 numbers. The problem I have with that is that the shortfall in the total Q1 receipts is due to a decline in social security and Medicare withholding, and the tax rates for these items has not changed. Since these taxes are a flat tax shouldn't they provide a much better indication of how many pay checks are being cut than income taxes which vary depending on the distribution of tax rates among the population? What do readers think?

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Social security and Medicare tax receipts are falling. This surely tells us much more about paychecks and employment than some of the other data being reported?

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But back to the question: Are Federal Withholding Taxes Rising or Falling YOY? In March total tax withholdings were rising.



Disclosure: No positions