payroll tax

Americans Feeling the Pinch of Payroll Tax Hike

by Michelle Smith, MoneyNews.com  |  published on February 14, 2013

Though the economy may not have been brought to its knees, some Americans are starting to feel the pinch of higher payroll taxes, and they claim it is already affecting their spending, The New York Times reports.

Now a part of history, the payroll tax break lightened the load of Social Security taxes by 2 percentage points in 2011 and 2012. When it was eliminated as part of the fiscal cliff deal, many economists warned it would have an adverse effect on the economy.

The new higher rate, which went into effect at the beginning of 2013 applies to the first $113,700 of earned income. Economists estimate it will cost the typical American worker about $1,000 a year, according to The Washington Post.

It’s only February and The Times says people with middle to lower incomes are already reporting the pinch. Many claim they have had to reassess their budgets. To cope with the reduction in income, they report delaying the payment of bills, eating cheaper foods and driving less.

“If you wanted to design a policy to squeeze the spending of lower- and middle-income households, raising the payroll tax is the way to do it,” Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors, told The Times. “It’s very regressive.”

Economists project the reduction in disposable income to be in the ballpark of $120 billion. This could sap half a percentage point from economic growth in the first quarter, they estimate. To put that into perspective, consider that the U.S. economy is only projected to grow 1 to 2 percent through June.

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