- Obama not worried about Ebola at upcoming African summit in D.C.
- Obama: ‘We tortured some folks’ after 9/11
- Obama administration asked whole D.C. Circuit to take on major Obamacare case
- Mark Levin: Topple GOP leadership or country will ‘unravel’
- Massachusetts to let police chief deny gun buys to those deemed unfit
- John Kerry condemns attack on Israeli soldiers, kidnapping
- U.S. starts to evacuate American Ebola patients from West Africa: Report
- Geraldo slammed as ‘dummy’ for backing Clinton’s bin Laden claim
- Israeli spokesman: No need to debate who broke the cease-fire
- 35 Palestinians killed; Israeli officer missing
Payroll tax saps consumer outlook
Sudden return erases gains
Question of the Day
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.
The board’s confidence index fell to 58.6 in January from 66.7 in December, its lowest level in 14 months. Confidence also slumped less noticeably in November and December as Congress and the White House engaged in battle over the tax package.
Chris G. Christopher, an economist at IHS Global Insight, called the dive in confidence a “super-bad” development that does not bode well for the economy.
“This is a major deterioration in confidence,” he said. “It is hard to find a silver lining,” with confidence about jobs, finances, home-buying and auto purchases all taking hits in the report, he said. “The new year has not started on a cheerful note. And consumer mood falls faster than it rises.”
The irony is the tax cut was noticed more in its absence than in its presence. Surveys at the time it was enacted showed that many consumers weren’t even aware of an increase in their take-home pay. But after two years of spending the extra cash from week to week, consumers clearly were missing the spare change, which added up to about $1,000 a year for the average taxpayer.
The confidence slump did not cause much concern on Wall Street, where it came as no surprise. An earlier report on consumer sentiment from the University of Michigan revealed the sharp consumer reaction to the tax increase. The markets focused on more upbeat news about the economy Tuesday, including a 10th straight monthly rise in home prices reported by Standard & Poor’s Corp.
But Matthew Shay, president of the National Retail Federation, said the loss of confidence likely foreshadows another dodgy year for consumer spending. He noted that just the fight over taxes in Congress, even before the tax hit people’s paychecks, caused a drop in confidence and spoiled what started out as a strong Christmas selling season at the end of last year.
The holiday season started with a bang, with record levels of sales around Thanksgiving. But the din from Washington over the budget and taxes in the weeks surrounding Christmas and New Year’s prompted consumers to withdraw from malls, bringing the shopping season to a weak end, he said. Spending rose by 3 percent during the holidays — an uninspiring performance, he said.
“The holiday season went head-to-head with Washington’s political wrangling over fiscal concerns, shifting consumers’ spending plans downward,” Mr. Shay said.
Since the battle over taxes and spending was not resolved at year’s end, with Congress postponing the deadline for $100 billion in across-the-board spending cuts until March, the same thing could happen this year, he said.
“What we witnessed during the holiday season is an indication of what we are likely to see in 2013. Consumers read troubling economic headlines every day and look at their bottom lines at the end of the month, and they don’t like what they see,” he said.
“Pushing fiscal policy decisions down the road will lead to even greater uncertainty, and will continue to impact consumers’ desire and ability to spend on discretionary items. The administration and Congress need to pursue and enact policies that lead to growth and economic expansion, or it could be another challenging year for retailers and consumers alike.”
© Copyright 2014 The Washington Times, LLC. Click here for reprint permission.
About the Author
- Unemployment rose to 6.2 percent in July; 209K jobs added
- Economy springs back in nearly every sector
- Energy Department eyes regional gas reserves for emergency use
- Economists see signs of another market bubble
- Crude oil will head north of the border to Canada
Latest Blog Entries
TWT Video Picks
By Orrin G. Hatch
Procedural changes impede the chamber's traditional deliberative function
- Border agents cleared of civil rights complaints from illegal immigrant children
- U.N. condemns Israel, U.S. for not sharing Iron Dome with Hamas
- Obama military strategy too weak for future security, panel reports
- Porn-surfing feds blame boredom, lack of work for misbehavior
- Ben Carson takes major step toward presidential campaign
- Feds raid S.C. home to seize Land Rover in EPA emission-control crackdown
- Ted Nugent slams 'lying freaks' at liberal media: I'm 'doing God's work'
- CRUZ: A tale of two hospitals: One in Israel, one in Gaza
- Report: 40% of weapons sent to Afghanistan are unaccounted for
- House backs faster deportations, cancels 'Dreamer' policy
Top 10 U.S. military helicopters
Obama's biggest White House 'fails'
Celebrities turned politicians
Athletes turned actors