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Washington - Americans Feel Austerity's Bite As Payroll Taxes Rise

Published on: January 12, 2013 11:05 PM
By: Reuters
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In this Thursday, Oct. 25, 2012, photo, a sign attracts job-seekers during a job fair at the Marriott Hotel in Colonie, N.Y. The October employment report the government will release Friday, Nov. 2, 2012 will likely solidify the picture of the U.S. job market that’s emerged this year: Companies are hiring steadily but cautiously. And unemployment remains high. (AP Photo/Mike Groll)In this Thursday, Oct. 25, 2012, photo, a sign attracts job-seekers during a job fair at the Marriott Hotel in Colonie, N.Y. The October employment report the government will release Friday, Nov. 2, 2012 will likely solidify the picture of the U.S. job market that’s emerged this year: Companies are hiring steadily but cautiously. And unemployment remains high. (AP Photo/Mike Groll)

Washington - Americans are beginning to feel the pinch from Washington’s decision to embrace austerity measures aimed at bringing down the nation’s budget deficit.

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Paychecks across the country have shrunk over the last week due to higher federal tax rates, and workers are already cutting back on spending, which will drag on the economy this year.

In Warren, Rhode Island, Ben DeCastro got his first paycheck on Friday in which taxes on his wages rose by 2 percentage points. That works out to about $30 a week.

“You sit back and do the calculation, and that’s $30 I’m not going to spend at a restaurant,” said DeCastro.

He said he worries that people hit by higher taxes will spend less at the chain of furniture stores where he works as a marketing manager.

Politicians in Washington made much hubbub last week about a bipartisan deal to soften or postpone some $600 billion in scheduled tax hikes and government spending cuts. President Barack Obama said the deal would shield 98 percent of Americans from a middle-class tax hike.

Nevertheless, for most workers, rich and poor alike, taxes went up on December 31 as a temporary payroll tax cut expired. That cut - a 2 percentage point reduction in a levy that funds Social Security - was put in place two years ago to help the economy, which was still smarting from the 2007-09 recession.

About 160 million workers pay this tax, and the increase will cost the average worker about $700 a year, according to the Tax Policy Center, a Washington think tank.

“It stinks,” said Beverly Renfroe, an accountant for a realty firm in Jackson, Mississippi. “I definitely noticed a decrease.”

The pain will trickle through the economy over the next few weeks. Already, the new rate of 6.2 percent has trimmed paychecks for about half of the 200,000 employees whose paychecks are processed by Advantage Payroll Services, a payroll firm based in Auburn, Maine.

“HEADWIND TO GROWTH”

Economists estimate the payroll tax hike will reduce household incomes by a collective $125 billion this year. Some households could reduce contributions to retirement accounts or other savings, but most are also expected to cut back on spending.

That alone could reduce economic growth this year by about 0.6 percentage point, said Michael Feroli, an economist at JPMorgan in New York City.

“The headwind to growth should be noticeable,” he said.

Most mainstream economists say the government should still be trying to stimulate the economy by lowering taxes or raising spending to help bring down the 7.8 percent jobless rate.

Even Federal Reserve Chairman Ben Bernanke has said Congress could consider short-term stimulus measures if they can be coupled with a plan to tame the deficit over the long run.

But a consensus has emerged between Congress and the White House that the federal government should step up the pace at which it cuts the deficit, which ballooned during the recession.

That decision is having repercussions across the country.

In Bergenfield, New Jersey, Evelyn Weiss Francisco has put off plans to upgrade her cell phone and thinks she might go to fewer music concerts. A director at a public relations firm, she thinks the higher payroll taxes will cost her about $1,000 this year.

Some Americans will also pay higher income taxes this year. Congress and Obama let income tax rates rise for households making more than $450,000 a year, a partial repeal of tax cuts put in place under President George W. Bush. The wealthy will also pay a new tax to help fund a health insurance reform passed in 2010.

These will have a smaller impact on the wider economy because they affect fewer people. But taken together, this year’s tax hikes could subtract a full percentage point from growth, Feroli said.

Most economists see economic growth of roughly 2 percent this year, a lackluster pace held back by the government’s austerity measures that is likely to do little to reduce unemployment.

Failure to postpone government spending cuts due to begin around March would slow growth more, further frustrating the economic recovery.

DROP THAT BAGEL

The blow to the economy from the tax hikes will hurt the most during the first half of the year as people adapt to their smaller paychecks.

Consumer spending, which drives more than two thirds of the economy, will likely grow at a mere 1 percent annual rate in the first quarter, and 1.5 percent in the second, said Sven Jari Stehn, an economist at Goldman Sachs in New York.

Nicki Hagen, who received her first reduced paycheck on January 4 and then another on Friday, estimates the higher taxes will shrink her paychecks by about $10 a week.

She has already started holding back from coffee-and-bagel runs made by coworkers at the home improvement company where she works as an office administrator in New York City.

She expects a much bigger hit to her family’s income when her husband gets his first paycheck for 2013 on Tuesday.

The two will then sit down and figure out how to budget their money. They might cut cable channels, or take vacation days when their daughter is out of school to save on babysitter expenses.

“This is going to affect our lives,” she said.


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Read Comments (13)  —  Post Yours »

1

 Jan 13, 2013 at 09:06 AM ShmutzVesh Says:

Rush called this a few weeks ago. Next time people better listen carefully to the people in the know ,not believe Obama and his cohorts just tryin to gather votes by lying to the low information voters with thrills running up and down their legs!!!

2

 Jan 13, 2013 at 09:19 AM Babishka Says:

Obama appeared before Congress several times to beg them to extend the payroll tax breaks, but they did not listen to him. What this means is that social security withholding now goes up from 4.2% to 6.2%. This is GOP-dominated congress doing, not the President.

3

 Jan 13, 2013 at 09:34 AM Anonymous Says:

Reply to #2  
Babishka Says:

Obama appeared before Congress several times to beg them to extend the payroll tax breaks, but they did not listen to him. What this means is that social security withholding now goes up from 4.2% to 6.2%. This is GOP-dominated congress doing, not the President.

Stop drinking the obama koolaid. Please post support for your factually inaccurate statement that obama appeared before congress several times begging that this tax be cut.

4

 Jan 13, 2013 at 09:40 AM Geulah Says:

When will people start to get it. This country is a federal republic that Lincoln stated should have a government of the people, by the people and for the people. It has been hijacked instead by the political crime families who are more interested in their job security than in your well-being. It is not a Democrat or Republican issue nor is it a Democrat or Republican doing, it is the American people who have abrogated their constitutional responsibility to enact a representative government. We have instead allowed the media to tell us who their choices are based on the best headlines and the riveting schmutz that the media can get from them. We called this back in 1976 and we called it again and again afterwards, we have given in to the story wars and we, the people, have lost. We owe Jefferson and Hamilton our deepest apologies and we owe Franklin too. They foresaw the consequences, bitter consequences, of a government such as we have now. It is, as Pogo said - "We have seen the enemy, and he is us."

5

 Jan 13, 2013 at 10:27 AM Anonymous Says:

Your screed presupposes that the American people have a constitutional responsibility to enact a representative government when, in fact, no such obligation exists. Hence your entire comment must be disregared as rubbish. Thanks for trying, though.

6

 Jan 13, 2013 at 11:22 AM Anonymous Says:

Time for TERM and AGE limits in the House and Senate. If that offends the elderly readers of VIN that is too bad. Having Senators and Congressmen in their late 70's and 80's who refuse to step aside and let some younger people have a chance is wrong.

7

 Jan 13, 2013 at 11:51 AM rescue Says:

I'm sorry to say, but this just proves the boorishness of most people. All that happened was a reinstitution of a tax rate that has been the same for dozens of years that was reduced for 2 years. It was never meant to be permanent and any thinking person knew it would be going back up. This is not a tax increase, the discount that was in effect has expired.

8

 Jan 13, 2013 at 11:58 AM Stop Complaining Says:

Unfortunately, we Americans are a very spoiled people. We complain and qvetch when the power goes out, and when there are floods, and we have to live elsewhere. Yet, when the great tsuanmi of 2004 displaced and killed hundreds of thousands of people in many underdeveloped countries, there was very little complaining by those poor , wretched, individuals. The taxation rates here are still a bargain compared to many countries throughout the world, where tax rates are considerably higher. It is ok with me, if not only the payroll taxes are raised, but the tax rates across the board are raised, including tax rates on moderate earners, as well as high income earners. The government needs revenue to provide for the common defense, such as maintaining the armed forces, as well as to provide for various social programs which protect the elderly, feed the hungry, and house and clothe the poor. Citizens should count their blessings, and stop complaining!

9

 Jan 13, 2013 at 12:34 PM Geulah Says:

Reply to #5  
Anonymous Says:

Your screed presupposes that the American people have a constitutional responsibility to enact a representative government when, in fact, no such obligation exists. Hence your entire comment must be disregared as rubbish. Thanks for trying, though.

You've given up you're right to vote, then. Where did that come from?

10

 Jan 13, 2013 at 12:39 PM Anonymous Says:

Reply to #8  
Stop Complaining Says:

Unfortunately, we Americans are a very spoiled people. We complain and qvetch when the power goes out, and when there are floods, and we have to live elsewhere. Yet, when the great tsuanmi of 2004 displaced and killed hundreds of thousands of people in many underdeveloped countries, there was very little complaining by those poor , wretched, individuals. The taxation rates here are still a bargain compared to many countries throughout the world, where tax rates are considerably higher. It is ok with me, if not only the payroll taxes are raised, but the tax rates across the board are raised, including tax rates on moderate earners, as well as high income earners. The government needs revenue to provide for the common defense, such as maintaining the armed forces, as well as to provide for various social programs which protect the elderly, feed the hungry, and house and clothe the poor. Citizens should count their blessings, and stop complaining!

That's the point. We are a spoiled and entitled people whom have become accustomed to being given and whom have elected representatives refusing to follow the law instead making melodramatic soap opera attempts, on both sides of the aisle, to look as those they're saving us poor, barefoot, ill informed constituents. These rates should have returned to indexed norms 10 years ago. Instead we have the great house of political welfare telling us, not demonstrating, how wonderful they are by renewing them and both sides allowing the slide to hell be better greased. And they still made a mess out of it. Blessings, them potatoes are mighty poor blessings.

11

 Jan 13, 2013 at 01:13 PM Anon Ibid Opcit Says:

Reply to #3  
Anonymous Says:

Stop drinking the obama koolaid. Please post support for your factually inaccurate statement that obama appeared before congress several times begging that this tax be cut.

Sadly for you he is absolutely right. Those are the simple, verifiable facts.

12

 Jan 13, 2013 at 08:07 PM Tuvia Says:

Reply to #11  
Anon Ibid Opcit Says:

Sadly for you he is absolutely right. Those are the simple, verifiable facts.

"verifiable"? Then verify it.

13

 Jan 13, 2013 at 08:10 PM esther Says:

Reply to #8  
Stop Complaining Says:

Unfortunately, we Americans are a very spoiled people. We complain and qvetch when the power goes out, and when there are floods, and we have to live elsewhere. Yet, when the great tsuanmi of 2004 displaced and killed hundreds of thousands of people in many underdeveloped countries, there was very little complaining by those poor , wretched, individuals. The taxation rates here are still a bargain compared to many countries throughout the world, where tax rates are considerably higher. It is ok with me, if not only the payroll taxes are raised, but the tax rates across the board are raised, including tax rates on moderate earners, as well as high income earners. The government needs revenue to provide for the common defense, such as maintaining the armed forces, as well as to provide for various social programs which protect the elderly, feed the hungry, and house and clothe the poor. Citizens should count their blessings, and stop complaining!

yes,look at what's happening to many of those countries with high tax rates.their governments are going bankrupt. our government already has plenty of our money;throwing more money at it isn't the answer but more accountability for millions upon millions squandered and waisted is.

14

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