logo
  Join        Login             Stock Quote

Inside The Payroll Tax Hike

 February 10, 2013 12:09 AM


When Congress extended several tax cuts in its fiscal cliff compromise, it let a key one expire: The two-year payroll tax holiday. Beginning January 1, every American worker's taxes rose two percentage points, and most folks assumed lower take-home pay would weigh on economic growth in 2013. Yet thus far, data suggest the impact isn't as bad as feared.

Recall, Congress reduced the payroll tax from 6.2% to 4.2% for 2011 to help consumers during what they viewed as a shaky economic recovery, and they extended the holiday to 2012 when economic growth remained slower than they wanted (and when their poll numbers were at all-time lows—not good for politicians facing re-election in 11 months). During the fiscal cliff negotiations, it was largely a foregone conclusion the holiday would sunset—lame-duck politicians had little incentive to extend it, and talks never got off the ground as the 2001/2003 tax cuts monopolized the debate.

[Related -ADP: Private-Sector Payrolls Rise 213k In September]

Thus, most Americans entered 2013 resigned to earning less—$1,000 less per year for workers earning $50,000—with higher tax withholdings starting in January. And when polled for consumer confidence surveys, most said they planned to cut spending as a result. As usual though, what people said didn't match what they did: Despite the higher tax, January retail sales rose 4.5% year over year. Could spending have risen more without the tax increase? Sure—very possible. But the increase argues against the tax being a major shopping deterrent.

[Related -Suspicions Over ADP Employment Make-up]

Now, this is just one data point, and the long-term impact remains to be seen—and some outlets suggested other temporary variables overshadowed the tax hike's drag on growth. For example, the retail industry's fiscal calendar added an extra week to January 2013—January 2013 included the five weeks ending February 2, while January 2012 included only the four weeks ending January 28. Many observers claimed the extra week distorted the year-over-year comparisons, obscuring somewhat weaker results. However, some retailers that reported four-week and five-week sales showed strong results in both, suggesting the statistical quirk wasn't terribly impactful.

Others suggested consumers only shopped more because of huge clearance sales. And steep discounts likely did draw folks to the mall. But once there, they still spent more—not quite what you'd expect if they were in full cost-cutting mode. We suppose one could argue folks merely stocked up on cheaper goods in January in anticipation of leaner times ahead, but for that to be true, we'd need evidence consumers spent most of their payroll tax savings in 2011 and 2012. Only, they didn't. According to Fed data, households only spent 36% of their payroll tax savings in 2011—the rest went to savings or paying down debt. Hence why consumer spending growth didn't much change during the payroll tax holiday (Exhibit 1)—small, temporary tax adjustments in either direction typically don't significantly change folks' behavior.

Exhibit 1: Household Spending

Source: Bureau of Economic Analysis.

In fact, much as we love tax cuts and believe them a marginal good for the economy, it's difficult to argue this one had much impact on economic growth. GDP, consumer spending and disposable incomes were already growing nicely before it took effect, and disposable income—the biggest determinant of spending—didn't accelerate during the holiday. Gross personal income followed a similar trend—higher earning power, not the lower tax rate, drove disposable income gains. (Exhibit 2).

Exhibit 2: Gross and Disposable Income

Source: Bureau of Economic Analysis.

Since the holiday didn't have a big positive impact, we wouldn't expect its expiration to be a huge negative—with incomes trending up, over time, folks likely keep earning more despite the higher tax rate, and consumer spending should continue rising in kind (though, as always, growth rates could fluctuate).

That said, we'd much prefer a lower payroll tax. The payroll tax may be small in the grand scheme of things, but it's regressive, and like all taxes it transfers money from efficient spenders (people) to inefficient (the government). We'd much rather have the extra cash in consumers' (and our) pockets. But even with the small hike, overall income tax rates remain near historic lows—and that should be good enough for continued economic growth. 

source: Market Minder
Disclaimer: This article reflects personal viewpoints of the author and is not a description of advisory services by Fisher Investments or performance of its clients. Such viewpoints may change at any time without notice. Nothin herein constitutes investment advice or a recommendation to buy or sell any security ot that any security, portfolio, transaction or strategy is suitable for any specific person. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article imageADP: Private-Sector Payrolls Rise 213k In September

Private-sector employment continued to rise at a moderate pace in September, according to this morning’s read on...

article imageSuspicions Over ADP Employment Make-up

he private payroll processor noted that the sixth continuous payroll gain above 200,000 was a “positive read on...

article imageLessons From the Golden Bear

How attractive is gold when it comes to investing over the long read on...

article imagePondering The Slide In US Inflation Expectations

The Treasury market’s inflation forecast via 10-year Notes continues to fall and the US stock market has read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center

Related Articles:

Lessons From the Golden Bear
More Articles on: Economics Data



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.