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.”