Posted on November 29, 2022
We estimate that growth in federal tax withholding–amounts of income and payroll taxes withheld from workers’ paychecks and remitted to the U.S. Treasury–grew by 3.9 percent in November compared to the amount from November of a year ago (see chart below). Withholding amounts tend to track overall wages and salaries in the economy, which would suggest that economywide wages are running well below overall inflation. Withholding in November also ran at a slower clip than in October (at 5.7 percent) and slower than in all but one of the past six months (in September), suggesting that economywide wage growth has been slowing. Nonetheless, direct measures of economywide wage growth from the Bureau of Labor Statistics (BLS) in its monthly establishment report of private-sector workers and the Bureau of Economic Analysis in its monthly GDP accounts have painted a rosier picture in recent months, with economywide wage growth only very gradually declining over the past half year. Those data are subject to revision and are lagged, and we get the BLS employment report for November on Friday of this week.
Note that our measure of withholding growth is constructed by starting with the actual amounts of withholding as reported daily by the U.S. Treasury Department and then removing both the estimated effects from different months having a different makeup of business days and the estimated effects (currently zero) of tax law changes (see our methodology). Our measure doesn’t identify withholding growth measures for certain days, such as immediately after holidays and around the end of the month (both of which affect late November), when volatile day-to-day withholding remittances make it difficult to identify reliable measures of growth. We can though get a reliable measure of a month’s withholding growth even a bit before the month ends; the withholding information continues to reflect recent payments of wages and salaries, because much withholding is remitted by employers to the Treasury the day after a worker is paid, and the Treasury Department releases the overall amount of withholding remittances the following day.
Economywide wage and withholding measures do not always move closely together, as we have observed over the past six months or so. The causes of the deviations can take some time to understand. One simple possibility is that the BEA measure of wage and salary growth, which is eventually based on better data than the BLS measure, will be revised in the future to be more in line with the withholding data. That has certainly happened in the past, and it could happen either sooner (such as in this week’s release of the GDP accounts that will update the second and third quarters with new wage data, see previous post), or later (such as in the major annual revision to the GDP accounts next summer). A second quite plausible possibility is that wage distributional shifts could be reducing average withholding tax rates, thus reducing withholding growth relative to wage growth. For example, there is evidence that in recent months lower-wage workers, who face the lowest tax rates, have been catching up on relative wage losses during the worst of the pandemic, with their wages now growing faster than those of higher-wage workers (see real-time measure from Blanchet, Saez, and Zucman).
We’ll be watching the revisions to the GDP accounts this week, the BLS employment report to be released on Friday, and then how much withholding is collected in the month of December. December withholding is always difficult to interpret because of year-end bonuses, much of which are in the financial industry. In addition, this December is when the second and final installment is due to the Treasury of payroll taxes that firms elected to defer remitting in 2020, as allowed by legislation enacted in March of that year.
