Payroll Taxes Hitting Home, Or Not

Last week, I posted an anecdote about employees not knowing that payroll taxes were heading up.  This week I see in the New York Times:

Jack Andrews and his wife no longer enjoy what they call date night, their once-a-month outing to the movies and a steak dinner at Logan’s Roadhouse in Augusta, Ga. In Harlem, Eddie Phillips’s life insurance payment will have to wait a few more weeks. And Jessica Price is buying cheaper food near her home in Orlando, Fla., even though she worries it may not be as healthy.

Like millions of other Americans, they are feeling the bite from the sharp increase in payroll taxes that took effect at the beginning of January. There are growing signs that the broader economy is suffering, too.

Chain-store sales have weakened over the course of the month. And two surveys released last week suggested that consumer confidence was eroding, especially among lower-income Americans.

Yet I also see this in the Wall Street Journal:

U.S. retailers turned in strong sales for January, a time of heavy promotions to clear holiday goods and make way for early spring merchandise.

January is the end of the fiscal year for most retailers, and the month serves as a good barometer of how much consumers have left over after holiday spending and provides inklings of what type of buying may lie ahead.

January sales were helped by a number of factors, including the averted mix of tax increases and government-spending cuts called the “fiscal cliff,” growth in jobs and greater wealth from home prices and the rising stock market.

So which is it?  How much will the tax increase weigh on the economy?  Is this a case of bifurcated spending growth as higher income groups experience greater spending power via wealth impacts? Or do we simply need to wait until February to see the full impact of the tax hikes?

About Tim Duy 348 Articles

Tim Duy is the Director of Undergraduate Studies of the Department of Economics at the University of Oregon and the Director of the Oregon Economic Forum.

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