As you may recall, earlier this year, payroll taxes in the U.S. went up by 2% and I discussed how that tax increase could potentially affect spending. Well, we’re done with first quarter, so how have consumers reacted to that $16 less (based on average weekly earnings on non-farm payrolls) in take-home pay each week?
- Consumer spending increased the first two months of the year (up 0.7% in February and up 0.4% in January).
- Consumer confidence took a temporary hit in January, and then generally recovered in February and March.
And, here’s the real kicker, according to a survey recently done by Bankrate.com, almost half of Americans surveyed (48%) didn’t even notice the payroll tax increase. Read more
After the fiscal-cliff deal, the payroll tax rate – income withheld from our paychecks for social security – went up from 4.2% to 6.2%. For the last two years, American employees were paying a little bit less in social security withholding and the jig was up last week. This rate increase is an effective increase in taxes of about $16 per week (or about $850 per year) for the average American worker.
What does this reduction in income mean for economic growth for 2013? A lot of retailers are concerned that, with less money in their pockets, Americans will spend less. In line with economic theory (taxes increase, demand goes down), many economists forecast that the payroll tax cut will have drag on consumer spending for the year (J.P Morgan expects 0.6% drag on growth, Goldman expects the same drag, Credit Suisse expects consumption spending to move from 2% in Q4 2012 to 1.5% in Q1 2013). We also think the payroll tax cut may have a bit of drag on consumer spending (here and here) in the first half of the year, along with the other changes in tax policy and uncertainty surrounding sequestration and the debt ceiling. Read more