Bad news: That payroll tax cut expiration might not do much for the economy

posted at 9:11 pm on February 4, 2013 by Erika Johnsen

As many of you likely experienced when your first paycheck of January came in, the payroll tax cut officially expired — i.e. your payroll tax was increased from 4.2 percent of your wages to 6.2 percent. As it turns out, eliminating a tax cut meant to help grow the economy, may actually have the opposite effect when it’s taken away. Odd, that.

Via the National Journal:

Thanks mostly to the payroll-tax hike (as well as a tax-refund delay and high gas prices), growth in consumer spending this quarter could be slowed to a fourth of its potential. The eight-quarter average suggests the country was headed for growth of about 2 percent, the economists wrote. But as consumers grapple with smaller paychecks and other special factors, the pace of expansion could come in at a minuscule 0.5 percent.

RBC [Capital Markets]‘s chart shows clearly what that drag on consumer spending could look like. (Note: the orange bar on the left represents the trend in spending growth. The one on the right represents what the RBC folks expect.)

Just watch: If the first quarter’s economic growth somehow, miraculously manages to come in without any significant improvement over the fourth quarter’s negative rate, it will still be “unexpected,” and it will still be the fault of Congressional Republicans and all of their dastardly gridlock — the only problem with that logic being that higher taxes are exactly what President Obama wanted. But, no matter, the Democrats and Obama are going to keep pushing for more ‘revenue’ and government spending to boost our economy in this time of abnormally extended trouble; those tax hikes from the fiscal cliff weren’t nearly enough, seeing as how the federal government knows how to spend money such much more effectively and efficiently than the private sector, and all.


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