Expiration of payroll tax cut will lead to reduction in spending and slowdown in paydown of consumer debt: Survey
A significant majority of Americans plan to cut spending in the wake of the expiration of the payroll tax cut, a New York Federal Reserve Study finds.
Seventy-nine percent of respondents said they will cut their personal spending, while 20 percent said they will cut savings. Just 2 percent said they will increase their debt.
The 2011-2012 payroll tax cut had reduced Social Security and Medicare taxes withheld from workers’ paychecks by 2 percent. The tax cut affected nearly 155 million U.S workers and afforded an average household earning $50,000 an additional $1,000 a year. As part of the fiscal cliff deal reached at the end of 2012, Congress allowed the payroll tax cut to expire.
Regardless of how individuals had done with the extra money from the payroll tax cut, most now say that they will prioritize cutting spending. This was found to be the case among the 86 percent who said they mostly spend the extra funds, the 80 percent who used the money to pay off debt, and the 68 percent who said they primarily saved the extra funds.
Consumer spending accounts for 70 percent of the economy. With the expiration of the payroll tax cut, families are projected to cut back on their annual spending by $720, according to the survey. An earlier study found that the average household spent about $380 of their tax savings.
How will the loss of income impact spending in wealthier and lower income households? Nearly two-thirds of the former (64 percent) plan to cut back on spending, vs. 77 percent of the latter, who have an annual household income of $75,000 or less. These lower-income Americans were more likely to use the extra tax cut income to pay down debt, while their wealthier counterparts were more likely to spend it.
Affluent investors surveyed last November by Spectrem’s Millionaire Corner saw this coming. Eight-six percent overall braced themselves for a tax increases. Millionaires surveyed were even more pessimistic about the consequence of the fiscal cliff. Ninety-two percent expected to be hit with a tax hike.
Less affluent investors with a net worth of less than $100,000 were significantly more likely than Millionaires to resolve to cut spending (71 percent vs. 45 percent), and almost twice as likely to save more (25 percent vs. 14 percent). But these lower income investors were also more likely than Millionaires to say that they would have to dip into their savings or use more credit.
Related story: Less affluent more sensitive to tax hikes. Read more about it here.
Donald Liebenson writes news and features for Millionaire Corner. He has been published in the Chicago Tribune, The Chicago Sun-Times, The Los Angeles Times, Fiscal Times, Entertainment Weekly, Huffington Post, and other outlets. He has also served as a marketing writer for Chicago-based Questar Entertainment and distributor Baker & Taylor.
A graduate of the University of Southern California, he is married with a college-age son. He also writes extensively about entertainment.