Payroll Tax Hike Could Throw Economy into Reverse

The government is taking a bigger bite of American workers’ paychecks this year, which could mean another slowdown of the U.S. economy.

American workers are paying 2 percentage points more in Social Security taxes this year after Congress and President Obama allowed the Temporary Payroll Tax Cut to expire on Jan. 1. The slight increase means that workers, on average, will see $18-$20 less a week in their take-home pay.

That may not seem like much, but it amounts to about $125 billion out of the pockets of American workers. The impact on workers at the poverty level would be about $4.65 per week, while those affected at the top end (tax is capped at $113,700) will lost about $46.64 a week. Some of the places counting on that money being spent at their businesses include restaurants and stores selling consumer goods like clothing, shoes and food.

Bad For Business

“Anything that takes money out of the pockets of our customers creates a more challenging business environment,” Foot Locker Inc. Chief Executive Ken Hicks told analysts during the company’s earnings conference call.

“Most Americans don’t bother to save much, so many people are living paycheck to paycheck, and small changes will quickly change behavior such as skipping meals or movies,” Jerry Davis, professor of sociology at the University of Michigan Ross School of Business, told Bloomberg News.

American workers paid 6.2 percent of their salary to Social Security until Congress and Obama passed the Temporary Payroll Tax Cut in 2011. That shaved workers’ contributions to 4.2 percent, freeing up somewhere around $1,000 per person a year.

According to a Federal Reserve Bank study, the temporary payroll tax cut was a particularly efficient form of stimulus over the past two years. The study said that Americans reported spending between 28 and 43 percent of the money they got from the tax cut, which was far more than they had for previous tax cuts.

Now movement in the opposite direction is in play. For the first time in two decades, a tax increase has hit. People will have to find ways to pare their spending down by about $100 a month.

Spending Must Be Scaled Down

Things like upgrading cell phones, going to sporting events or concerts, or just taking the family out to a casual-dining restaurant, easily could fall to the side. Less money in the wallet every week means even more careful decision-making at home.

“Consumers are coming to the realization that their take-home pay is going to get smaller,” said Richard Yamarone, a senior economist at Bloomberg LP in New York. “That will translate into weaker spending. I expect the economy will spin its wheels for many months until the jobs picture, and associated incomes, improves.”

The expiration of the Payroll Tax Cut effectively nulls the small increase American workers had in wages in 2012. Salaries went up 2.4 percent in 2012, but the 2 percentage-point tax increase now levied on everyone’s wages makes that a wash.

“You work the same amount of hours and are taking home less money,” Kenny Williams, a teacher from Phoenix, told Bloomberg News.  “I don’t like it. We’ve all given more than our fair share.”

Author

Bill Fay
Staff Writer

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

In debt? We can help!

  • Amount
  • Type
  • Contact

How much do you owe?

What can we help you with today?

Related Articles

Tablet Screen with Tax Refund displayed on it

Practical Suggestion for Tax Refund: Pay off Credit Card Debt!

Most Americans will face a nice little dilemma in 2018. Thanks to tax cuts, we are going to take home more of our paycheck. But what should we do with that extra cash? If you use credit cards, finding the answer is a lot easier than executing it, so ...

Continue Reading
road sign with tax refund written on it

Best Ways to Spend Your Tax Return

The big financial question for America over the next few months is: How should I spend my tax refund? The Internal Revenue Service says most of you – somewhere between 75 and 80 percent – are getting one. The average tax refund in 2015 is going to be ...

Continue Reading
file tax return on a calendar

Didn’t File Taxes Yet? Here’s How To Limit Damage

April 15 has come and gone, but millions of Americans are still fretting over their taxes, mostly because they haven’t paid them yet. The IRS estimates that 25 percent of taxpayers missed the April 15 deadline, meaning about 30-40 million people ...

Continue Reading
As April 15 tax deadline approaches, IRS warns of identity theft and fraud.

Taxpayers Beware: Filing Scams and Refund Fraud on the Rise, Says IRS

There is encouraging news from the IRS this week: Statistically speaking, you likely are due a refund when you file a tax return. There is also discouraging news: That refund may end up with someone who stole your identity. So it goes with America’s ...

Continue Reading
Education tax credits can help young couples

Education Tax Credits Offer Big Savings for College Students and Their Families

As the April 15 deadline to file taxes approaches, it's important for college students and their parents to be aware of education tax credits, which can save families thousands of dollars a year. The American Opportunity Tax Credit and the Lifetime Learning ...

Continue Reading
Tax return preparation

IRS Shares Tips on How to Avoid Fraudulent Tax Preparation Services

Tax fraud related to identity theft is a rapidly growing problem. It involves thieves using your personal identifying information to file false tax returns in order to receive big refunds. Thieves can get ahold of your information in any number of ways, such ...

Continue Reading
Counting bills next to tax form

Identity Theft, Tax Fraud Increase as IRS Attempts to Curb Crimes

  As if tax season isn’t difficult enough, taxpayers must now be on alert for suspicious activity that could indicate that they are victims of tax-related identity theft.   During last year’s tax season, the Internal Revenue Service ...

Continue Reading
Tax refunds delayed

Delay in Tax Filing Season Means Later Refunds for Many

Millions of taxpayers banking on refunds from the IRS will have to wait a little longer to get them this year. The last-minute passage of the American Taxpayer Relief Act – better known as the fiscal cliff bill – has pushed back the start of tax filing ...

Continue Reading
Get Help Now

Overwhelmed with debt? You have options for lower monthly payments!

x