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January 22, 2013

Payroll Tax Increase May Hurt Consumer Spending

Posted in: Uncategorized

One part of the “fiscal cliff” deal that received little attention was the expiration of the middle class payroll tax cut. The tax increase occurred immediately and hit workers right in the paycheck.

While the lower classes may not drive the economy their spending does have influence:

A payroll tax increase of 2 percentage points has hit workers who have received their first paychecks of the year, and has many determining how they will cut back in 2013.

The tax increase came when Congress decided not to renew a temporary payroll tax reduction as part of the fiscal cliff negotiations at the end of December. The rate returned to 6.2% as a result.

While it is unlikely that the income tax increase on those making $450,000 will have any negative impact on the economy, the lower paychecks for the working class are likely to not only reduce consumer spending in the short term but shift the mindset of consumers towards more saving – a dangerous notion in a period of austerity and low growth.

Nearly a third of store managers say shoppers are cutting back on spending due to the payroll tax increase, according to a survey by retail industry research firm Merchant Forecast of 52 store managers in malls across the country. The survey was conducted the second weekend of the month and store managers based responses on foot traffic and sales figures, among other things.

And all this before there are further cuts to government spending and benefit programs. Austerity hasn’t worked in Europe and it won’t work here.


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