U.S. corporations are feeling a financial pinch- a pinch they blame not on the economy in general, but on reductions in spending power due to higher payroll taxes, as reported by Business Week on March 3, 2013.
Americans do, indeed, have less money for general spending than they did in December, 2012. Incomes dropped in January, but the Department of Commerce reported that spending was up for the first month in 2013, as Americans decided to continue spending in spite of lower income, choosing instead to reduce savings and investment rather than modify spending habits. However, February appears to be a different story, with Americans no longer dipping into savings and choosing instead to forgo ordinary purchases due to less discretionary spending.
There is no doubt that payroll taxes have caused some of the financial strife Americans are feeling. Social Security taxes, in particular, are blamed for the much of the financial shortfall. The Social Security tax rate of 6.2 percent was cut to 4.2 percent in January, 2011 and it remained at this lower rate for two years. It was returned to its former 6.2 percent rate in January, 2013, immediately lowering Americans’ discretionary spending by two percent.
The return of Social Security to its previous rate wasn’t completely surprising. The decrease in the Social Security tax rate in 2011 was only temporary and was intended to help stimulate the economy. Many hoped it would remain at its low, 4.2 percent rate for at least one more year, but it was returned to its former rate as part of the Fiscal Cliff compromise reached late in 2012.
Since Social Security tax is a flat tax and is paid by everyone- including those making minimum wage- an increase in the payroll tax is bound to affect the economy, at least to some degree. Wealthier Americans are less affected, but for poorer individuals and families, the two percent payroll tax hike means that certain, simple “luxuries”, such as dining out and paying for lawn service, will have to be reconsidered. This will impact the economy overall with the greatest pinch felt by businesses such as fast food and other industries that count on lower and lower middle- income shoppers for a significant portion of their business.
A payroll tax hike will likely lower economic growth for the year, but companies should not necessarily blame the Social Security tax increase for dismal financial performance, and Americans should not accept this excuse so readily. There are many other financial factors that affect consumer spending and all need to be considered in the aggregate before any definite conclusion can be drawn. Higher gasoline prices are one good example of a drag on the economy- one that is contributing to lower discretionary spending overall and could be even more influential on Americans spending habits than the payroll tax increase.
The U.S. economy continues to struggle and increased payroll taxes are at least partly to blame. The next few months could be pivotal as Americans await tax return checks and sort out their finances in the face of lower net pay and reduced purchasing power.
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