Payroll tax saps consumer outlook

by Patrice Hill, The Washington Times  |  published on January 31, 2013

payroll tax

It was the tax cut that nobody noticed two years ago. And it was rarely mentioned in the fight between Congress and the White House last year over the expiring Bush-era tax cuts. But this month, the payroll-tax cut suddenly registered on everybody’s radar screen — when it went away.

The Jan. 1 expiration of the 2 percentage point cut in the tax every worker pays to finance Social Security has prompted a huge drop in consumer confidence, wiping out all the gains registered in 2012, the Conference Board reported Tuesday.

Though long expected and not much discussed in Washington, the sudden tax increase appeared to take consumers by surprise.

Amid all the publicity about a $650 billion tax deal between Congress and the White House at the end of the year, some people apparently were expecting only “tax hikes on the rich” trumpeted by the media.

But the payroll tax provision — enacted as part of an economic stimulus deal between President Obama and Congress in 2011 — hit primarily middle- and low-income consumers, and for months had been singled out by economists as the most significant tax increase under consideration because it would hit more than 100 million consumers of modest means, not just the well-to-do.

“The increase in the payroll tax has undoubtedly dampened consumers’ spirits, and it may take awhile for confidence to rebound and consumers to recover from their initial paycheck shock,” said Lynn Franco, an economist at the Conference Board.

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