Just as shoppers are putting away Christmas decorations and paying the credit card bills from last year’s holiday gifts, they have less money in the bank to pay their bills. According to a recent Gallup poll, most consumers planned to spend $770 during the holiday season, slightly more than they spent in 2011.
In 2009, President Obama advocated for a two percent reduction in employee payroll taxes to ease the economic burden on working families. Workers have enjoyed the extra take-home pay since Congress passed that tax cut into law. But as folks opened their pay stubs in the first weeks of this year, they noticed their checks were smaller. Although Congress voted and the President signed the bill to keep many tax cuts in place for middle-class Americans, they actually raised taxes on the majority of workers by allowing the payroll tax cut to expire.
By raising the payroll tax withholding from 4.2 to 6.2 percent, a worker making $50,000 a year will pay an additional $1,000 in taxes. That’s $83 a month that will go to the government instead of putting that money into their gas tank or saving it for next Christmas. The Grinch has shown up well before Christmas Eve 2013, and will most likely have a significant impact on consumer’s ability to spend money. Take a moment to assess what your family spent on holiday gifts, meals and travel last year. Will your plans this December be different after you’ve looked at your January paycheck?
This month-long tax hike began in January and affects all wage earning workers regardless of their incomes. The financial pain isn’t as immediate, but having 2 percent less in each paycheck may force consumers to make choices and forgo purchases. It has the potential to significantly constrict economic growth. With the debt ceiling debate in Washington in a matter of weeks, tepid corporate earnings and fragile economic data, these tax increases could lead the economy back into recession.