Do not underestimate the coming impact of higher payroll taxes to workers and employers as well as the new cost of providing healthcare and its 3.8% tax on many types of income. Part of the tax increase came when Congress decided not to renew a temporary payroll tax reduction as part of the fiscal cliff negotiations, the part related to healthcare, was part of prior legislation being phased in. The profound effect on discretionary spending will be a shock to our fragile economy. While the government has no intention of living within its budget these two taxes will bring a cold and harsh reality to the spending habits of millions of Americans.
The payroll tax increase of 2 percentage points has hit workers who
have now received their first paychecks of the year, it goes right to the heart of discretionary spending which is the part of a persons income not already committed to a fixed monthly payment such as rent. Since only about half our income is discretionary, the tax will have about twice the drag most people expect. Already many people are determining how they will cut back in 2013. While many economist say it is not likely have a significant impact overall
on the economy, it will effect buying habits and where people choose
to shop, especially those in lower-income households. While these taxes have been talked about, many workers are suffering both surprise and shock.
Nearly a third of store managers say shoppers are cutting back on
spending due to the payroll tax increase according to a survey of store managers in
malls across the country. These taxes may also have an instant and noticeable impact on the cost of goods and services as businesses try to push on to consumers through higher prices part of their pain. Up to now little attention is being paid to the potential impact of these two taxes that burden those working to make a living. Recently the stock market has been on fire, rising day after day, but mark my words, the impact of these two taxes may soon become apparent through slowing economic activity.
Footnote; The economy has been pushed foreword by demand being created by unsustainable deficit spending. What happens when the momentum ends? I try to address this issue in another post;