Posted on October 3, 2023
We estimate that federal tax withholding–the amount of income and payroll taxes withheld from workers’ paychecks and remitted daily to the U.S. Treasury–grew by 5.6 percent in September (compared to the amounts from September 2022). That is the fifth consecutive month in which withholding growth was between 5.1 percent and 5.6 percent (see chart below). It’s reminiscent of the period in the summer and fall of 2019, before the pandemic, when withholding growth was roughly stable for five consecutive months at just a little higher level–between 5.4 percent and 5.9 percent. Our measure of withholding growth adjusts the actual amount of withholding to remove the estimated effects of tax law changes (with no such adjustments needed this year) and to standardize the calendar across months.
Tax withholding growth in the past few months has been roughly in line with recently-available data on economywide wages (including salaries) from the National Income and Product Accounts (NIPAs) as measured by the Bureau of Economic Analysis (again, see the chart below). In addition, annual revisions to the NIPA data made in late September saw growth in economywide wages revised down for 2022 by almost 1 percentage point, about what we expected and reducing the wedge we have observed for 2022 between economywide wage growth and withholding growth. Some wedge remains for 2022, with withholding growth lagging wage growth by about 1.5 percentage points. We believe that some significant part of that remaining wedge stems from wage distributional shifts, in which lower-income workers–who face lower overall tax rates on wages and salaries–had faster growth in that type of income than did higher-income workers in 2022. Such distributional shifts lower overall tax withholding amounts per dollar of wages.
The recent NIPA revisions actually raised growth in economywide wages and salaries for 2023, despite lowering growth in 2022. Once again, we’ll have to wait to see if 2023 growth, especially in the first several months of this year, gets revised down when more complete information becomes available. The withholding data don’t get revised, but the NIPA data on wages and salaries are subject to considerable revision.
