Confirmed: Payroll-tax holiday a big nothingburger

posted at 10:01 am on February 8, 2013 by Ed Morrissey

This should be a lesson to politicians and economists about the nature of gimmicky “stimulus” efforts …. but probably won’t be.  In the pressure cooker of the tax fight over the holidays, most people forgot about the payroll-tax holiday — the reduction by two percentage points of FICA withholding for Social Security.  Its backers claimed that putting $20 a week in the hands of earners would boost spending and the economy, which turned out to be entirely false.  They then claimed that the expiration of this temporary stimulus would tank the economy through reduced spending.

And that also turns out to be false.  The Washington Post is (mildly) shocked, shocked to find people spending money anyway:

Some of the nation’s largest retailers posted solid gains in January even though shoppers were hitting the malls with smaller paychecks.

The results reported Thursday offer the first glimpse into how the expiration of the payroll tax cut is affecting household budgets. A worker making $50,000 a year faces a decrease of $1,000 in take-home pay over the course of the year, and economists predicted spending would fall off. But many companies found that shoppers were more resilient than expected.

According to the International Council of Shopping Centers, retail sales rose 4.5 percent in January compared with a year ago. The data cover sales at stores open at least a year for 22 national chain stores.

“Simply put, January was an outstanding month,” Macy’s chief executive Terry J. Lundgren said.

The Post also cautions that this is more or less anecdotal still.  Official retail numbers don’t come out until next week, and stores like Wal-Mart don’t post monthly results.  Still, with higher-end retailers like Macy’s and Nordstrom’s posting double-digit increases, and mid-market retailer Kohl’s following suit, it seems unlikely that a discounter like Wal-Mart would be hard hit in the same period.

Surprised?  Don’t be.  The payroll tax holiday didn’t do anything positive for retail sales when it was implemented, as I explained last year when I first pointed out that its expiration was approaching:

Both sides sold the payroll tax holiday as an economy-stimulating policy. As such, though, it simply followed the failures of Barack Obama’s Making Work Pay weekly tax rebate and George Bush’s lump-sum tax rebate. The numbers involved, about $20 per week, hardly constitute an incentive for spending freely. In the first year of this particular holiday season, personal consumption expenditures (PCE) increased by 3.1 percent (annualized) in the first quarter, but then only rose 1.0 percent, 1.7 percent, and 2.0 percent in subsequent 2011 quarters. In the year prior to this policy’s enactment, PCE grew at more than 2.5 percent each quarter, hitting 4.1 percent in the final quarter before Congress passed this particular stimulus. It’s possible to argue that these 2011 numbers might have been worse without the tax holiday, but it’s impossible to argue that it led to resurgent economic growth.

Furthermore, this “holiday” comes with a price. The money comes out of the Social Security Fund’s revenue stream, which already doesn’t produce enough income to cover outgoing expenditures. This stimulus measure is aptly named, as it provides a “holiday” from fiscal sense in a program that is already on the road to insolvency, if not as quickly as Medicare. At least in principle, this tax cut doesn’t keep funds from the government — it takes it from the retirement funds of the taxpayers themselves, just as if the money had come out of a 401(k) account.

The decision to spend doesn’t come from government stimuli.  The payroll-tax holiday joins its predecessors like Making Work Pay and the 2008 Bush stimulus checks that purport to push economic growth by temporarily allowing people to keep a little more of their own money.  It’s yet another Cash-for-Clunkers gimmick that doesn’t drive anything but instability and ambiguity.

If we want real economic growth, then we need tax reform that eliminates those two qualities and allows Americans to spend and invest with confidence.  That’s the lesson from the payroll-tax-holiday nothingburger, but don’t expect politicians to learn it unless we teach it to them — and then test them on it at the ballot box.

Update: The New York Times spins a very different tale, pointing out how the payroll-tax holiday expiration hit poor families — and supposedly retail sales, too (via JWF and Instapundit):

Jack Andrews and his wife no longer enjoy what they call date night, their once-a-month outing to the movies and a steak dinner at Logan’s Roadhouse in Augusta, Ga. In Harlem, Eddie Phillips’s life insurance payment will have to wait a few more weeks. And Jessica Price is buying cheaper food near her home in Orlando, Fla., even though she worries it may not be as healthy.

Like millions of other Americans, they are feeling the bite from the sharp increase in payroll taxes that took effect at the beginning of January. There are growing signs that the broader economy is suffering, too.

Chain-store sales have weakened over the course of the month. And two surveys released last week suggested that consumer confidence was eroding, especially among lower-income Americans.

While these data points are preliminary — more detailed statistics on retail sales and other trends will not be available until later this month — at street level, the pain from the expiration of a two-percentage-point break in Social Security taxes in 2011 and 2012 is plain to see.

So other than a vague reference to a consumer confidence number, what other data does the NYT have to show retail sales falling?

Complete monthly data for retail sales in January will not be released until later this week, but the weekly data already available for last month showed a steady deterioration in shopping activity.

What weekly data? That’s never explained. The NYT offers a half-dozen anecdotes from people who say they are buying less, while the Washington Post uses actual sales figures from retailers that tell an entirely different story.  One of these two have gotten the story entirely wrong, and I’m pretty sure it’s the one without any real data.


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This is what you wanted, America, you voted for it and you got it.

So bend over and take your medicine good and hard. Whiners will be executed via drone-fired missile.

Bishop on February 8, 2013 at 10:04 AM

Can’t wait for ObamaCare to fully kick in…
Try to spin that one NYT.

Electrongod on February 8, 2013 at 10:09 AM

We lost $150/mo. It hasn’t effected my day to day spending but I had to back off on the extra money I was paying to get out of debt! Sucks!

maables on February 8, 2013 at 10:14 AM

Jack Andrews and his wife no longer enjoy what they call date night, their once-a-month outing to the movies and a steak dinner at Logan’s Roadhouse in Augusta, Ga. In Harlem, Eddie Phillips’s life insurance payment will have to wait a few more weeks. And Jessica Price is buying cheaper food near her home in Orlando, Fla., even though she worries it may not be as healthy.

So Jack Andrews can’t figure out a way to have “date night” that doesn’t include movies and a steak dinner at a run-of-the-mill restaurant chain. Eddie Phillips doesn’t manage his money well. and Jessica Price is a complete idiot if she can’t figure out how to buy nutritious food on a limited budget.

I don’t feel sorry for any of these people. Clearly they are reaping the benefits of giving the rat-eared wonder a second term.

Happy Nomad on February 8, 2013 at 10:15 AM

Like millions of other Americans, they are feeling the bite from the sharp increase in payroll taxes that took effect at the beginning of January. There are growing signs that the broader economy is suffering, too

…the soaring price of gas, utilities, food and other commodities does not effect anybody!…just the $20 increase in payroll taxes!
Who punches these people in the head?

KOOLAID2 on February 8, 2013 at 10:15 AM

So now NYT thinks higher taxes do reduce economic activity? These guys are confusing me. Bush’s tax cuts ruined the economy, but the expiration of an Obama tax holiday also hurts the economy? Water boarding was a war crime, but unilateral summary executions of American citizens are now OK? I can’t keep it all straight.

forest on February 8, 2013 at 10:15 AM

Bishop on February 8, 2013 at 10:04 AM

.
.
What Bishop said.

listens2glenn on February 8, 2013 at 10:17 AM

We lost $150/mo. It hasn’t effected my day to day spending but I had to back off on the extra money I was paying to get out of debt! Sucks!

maables on February 8, 2013 at 10:14 AM

You know what we call that? Being fiscally responsible. Maybe the folks in DC should try some of that instead of thinking they can still have their steak dinner on “date night.”

Happy Nomad on February 8, 2013 at 10:17 AM

It may take a while for the reduction in spending to filter through the usual noise in economic data, but I definitely noticed the change in my paycheck. Way more than losing “one date night” a month.

All in the name of wrecking Social Security faster and harder than anyone predicted. Thanks, Obumble.

NeighborhoodCatLady on February 8, 2013 at 10:17 AM

Who punches these people in the head?

KOOLAID2 on February 8, 2013 at 10:15 AM

Let me know if they’re looking for volunteers.

Happy Nomad on February 8, 2013 at 10:18 AM

Um…you’re wrong, Ed.

Just $20 a week? Chumpchange.

Except it’s not. It’s $150 per month when you consider both my salary and that of my wife. We have a tight budget from debt incurred to send my wife through a master’s program over the past two years. Now that she’s working again, we have a budget that allows us to pay all our debts and expenditures without adding any more debt. Barely.

We had a $50 per month buffer in the budget. Now we’re $100 in the hole. Thanks. Ed, you really think that $100 per month is not going to affect my family’s spending. You are simply wrong.

Too many people get paid at the end of the month. January won’t tell the tale. February will be dismal.

Church
PS. This may not work as a “stimulus” measure, but removing it sure will tank spending. Wait and see.

y2church on February 8, 2013 at 10:18 AM

We lost $150/mo. It hasn’t effected my day to day spending but I had to back off on the extra money I was paying to get out of debt! Sucks!

maables on February 8, 2013 at 10:14 AM

I don’t know if it’ll affect us that much in terms of our day-to-day expenditures since we live pretty frugally, but it will impact how much we can save or how much extra(if any) we can put towards paying off our mortgage early. And long-term, that will impact how much extra cash we’ll have to put back into the economy.

Doughboy on February 8, 2013 at 10:19 AM

Too many people get paid at the end of the month. January won’t tell the tale. February will be dismal.

y2church on February 8, 2013 at 10:18 AM

Just wait until sequestration kicks in. You think February will be dismal but I think March is going to be even worse. Not only from furloughed workers but also a general lack of confidence in the economy.

Happy Nomad on February 8, 2013 at 10:22 AM

Jack Andrews and his wife no longer enjoy what they call date night, their once-a-month outing to the movies and a steak dinner at Logan’s Roadhouse in Augusta, Ga. In Harlem, Eddie Phillips’s life insurance payment will have to wait a few more weeks. And Jessica Price is buying cheaper food near her home in Orlando, Fla., even though she worries it may not be as healthy.
So Jack Andrews can’t figure out a way to have “date night” that doesn’t include movies and a steak dinner at a run-of-the-mill restaurant chain. Eddie Phillips doesn’t manage his money well. and Jessica Price is a complete idiot if she can’t figure out how to buy nutritious food on a limited budget.

I don’t feel sorry for any of these people. Clearly they are reaping the benefits of giving the rat-eared wonder a second term.

Happy Nomad on February 8, 2013 at 10:15 AM

Take her during HAPPY HOUR!!

EVERY DAY from 3-6pm and 8-10pm you can get $2 beers and $2-$5 dollar food at Logan’s…

Their steak dinners are pretty pricey, so HAPPY HOUR is a much better ‘Date Night’ deal…

Khun Joe on February 8, 2013 at 10:25 AM

I’m guessing the weekly data is the amount of advertising in the Grey Old Maid.

Steve Eggleston on February 8, 2013 at 10:28 AM

We took a $168 per month hit. We’ve had to scale back a bit. Less eating out and limiting my wife’s shopping. Either way, I’ve talked to a lot of people and they’re feeling the pinch.

Also, I’m not sure I’d use people that shop at Macy’s and NORDSTROMS as qualified financial indicators. If you can afford to shop at Nordstroms during this depression, I’m pretty sure you’re gonna keep shopping there regardless.

robblefarian on February 8, 2013 at 10:31 AM

I can’t keep it all straight.

forest on February 8, 2013 at 10:15 AM

Liberalism is curvilinear.

Barnestormer on February 8, 2013 at 10:31 AM

You know what we call that? Being fiscally responsible. Maybe the folks in DC should try some of that instead of thinking they can still have their steak dinner on “date night.”

Happy Nomad on February 8, 2013 at 10:17 AM

Amazing isn’t it? Fiscal responsibility is a foreign concept to many in this country!

maables on February 8, 2013 at 10:32 AM

Hey, you think it’s bad to pay 6% instead of 4%? Jeez, what a bunch of whiners. Those of us who work as contractors have to pay the full 15.3%! Which means that at a $9-per-hour job, I make slightly more than minimum wage. ($7.63 per hour)

The only thing about Obamacare that makes me happy is that it will force lots of businesses to go to contractors instead of direct employees, and FINALLY people will see how much the Federal government is robbing from them.

JoseQuinones on February 8, 2013 at 10:33 AM

For my family, that “extra” money wasn’t going towards special nights out on the town – or for new items to be purchased – that money was helping pay down bills. We’ve been pretty hard-hit, my wife lost her company and is working for considerably less money. The bills have stacked-up, and it’s difficult making ends meet – in my world, every dollar helps.

Now with gas prices on the rise again, and this year’s health insurance premium hikes taking more out of my paycheck – the tunnel gets just a bit darker, and a bit longer.

Hill60 on February 8, 2013 at 10:35 AM

I don’t know if it’ll affect us that much in terms of our day-to-day expenditures since we live pretty frugally, but it will impact how much we can save or how much extra(if any) we can put towards paying off our mortgage early. And long-term, that will impact how much extra cash we’ll have to put back into the economy.

Doughboy on February 8, 2013 at 10:19 AM

Exactly right! Us too. My daughter starts college in the fall I failed to get the debt paid down soon enough to help her much. But if she gets enough loans the federal govt will eventually bail her out…. that’s the new way of thinking right?? /s

maables on February 8, 2013 at 10:35 AM

We took a $168 per month hit. We’ve had to scale back a bit. Less eating out and limiting my wife’s shopping. Either way, I’ve talked to a lot of people and they’re feeling the pinch.

Also, I’m not sure I’d use people that shop at Macy’s and NORDSTROMS as qualified financial indicators. If you can afford to shop at Nordstroms during this depression, I’m pretty sure you’re gonna keep shopping there regardless.

robblefarian on February 8, 2013 at 10:31 AM

Very true! Go ask the Target and Walmart shoppers and you may get a different answer. I would be willing to bet credit card debt will rise too.

maables on February 8, 2013 at 10:38 AM

I simply do not believe this BS report… How can so many consumers make less income a month and spend more?… Absolute BS… May be Macy’s had a super Sales in January because they get f***ed badly during the Christmas shopping season so people were buying the highly reduced price items in January…

mnjg on February 8, 2013 at 10:41 AM

We had to spend the tax holiday monies on FILLING OUR GAS TANKS Gas prices were $40 per tank more than when Obama was inaugarated. That’s $160 more a week, almost $2,000 per year…PER CAR.
We didn’t have that money to spend on ourselves.

originalpechanga on February 8, 2013 at 10:42 AM

It’s good that it expired.

It’ll buy us a few more months before Social Security inevitably collapses into a steaming O-turd.

CorporatePiggy on February 8, 2013 at 10:45 AM

Once all of the Christmas gift-card sales are exhausted, the story will be different.

Pork-Chop on February 8, 2013 at 10:45 AM

In the Obama years do not trust any economic or financial report by the government or by private institutions… The pressure is so immense coming from the Obama administration on these economic and financial reporting institutions both government and private to make up and report fake good news… We are living in the absolute age of LYING…

mnjg on February 8, 2013 at 10:47 AM

JoseQuinones on February 8, 2013 at 10:33 AM

What a minute: 15.3%? When you work your way through IRS Schedule SE, don’t you subject to SE tax an amount that bring the effective rate down to something like 12.4%? Your larger point is well taken, but I question your numbers.

The only thing about Obamacare that makes me happy is that it will force lots of businesses to go to contractors instead of direct employees, and FINALLY people will see how much the Federal government is robbing from them.

I doubt that will happen on a large enough scale. Employers seem to be knocking down hours, essentially creating part-time employees, but employees nonetheless. Employers can’t arbitarily recast employees as independent contractors, unless the want to invite an employment tax audit. And the IRS loves to perform those. Cutting hours? Yes. Arbitary reclassification of employees as independent contractors? No.

BuckeyeSam on February 8, 2013 at 10:50 AM

What a minute: 15.3%? When you work your way through IRS Schedule SE, don’t you subject to SE tax an amount that bring the effective rate down to something like 12.4%? Your larger point is well taken, but I question your numbers.

Point well taken, but the 2.9% Medicare contribution is also the employer’s responsibility for most people. As a contractor, I pay that. I should have specified FICA contribution, not just Social Security. For all intents and purposes, they are the same thing for me because they are made on the same Schedule SE-PR (for me).

JoseQuinones on February 8, 2013 at 10:54 AM

Arbitary reclassification of employees as independent contractors? No.

No, not arbitrarily. They will just lay people off and then hire independent contractors to replace them. Case in point: My wife works as a tutor for a large tutoring chain. Recently they “laid off” most of their employees in the city and “rehired” her as an IC. They spun it as a cost-cutting move, and there’s nothing short of a union that can prevent layoffs to cut costs.

JoseQuinones on February 8, 2013 at 10:57 AM

Illinoisans (Ill-annoyin’s) never got the benefit of the tax holiday. Democrat Governor Quinn used the opportunity to raise state taxes. But, they are now feeling the pinch of the expiration. Even with 2% more from working Illinoisans (and at the same time small businesses’ taxes were raise to 7% from 4.8%), the state continues to slide further and further into debt because of pensions, grift and freebies.

Fallon on February 8, 2013 at 11:03 AM

The reason it didn’t affect spending is because most people have already cut to the bone and are only spending what they have to to get by.

stefanite on February 8, 2013 at 11:04 AM

We had to spend the tax holiday monies on FILLING OUR GAS TANKS

originalpechanga on February 8, 2013 at 10:42 AM

Now there’s a date night idea for Jack Andrews!

Happy Nomad on February 8, 2013 at 11:06 AM

although i was against it because it took money from ss i have no doubt that poorer families would spend it add to the economy.

gerrym51 on February 8, 2013 at 11:07 AM

Tell me, what exactly do you mean by real data, and when was the last time there was any?

HiJack on February 8, 2013 at 11:30 AM

The next time they use this stunt, they should be required to remind people every payday that it is a temporary “holiday”, parhaps even putting the benefit as a separate item on the paystubs.

teejk on February 8, 2013 at 11:43 AM

Look, there are two reasons the SS tax holiday didn’t change anything… 1) it was too small to be noticed, and 2) we all knew it was going to be temporary!

You don’t change your spending habits with amounts you don’t notice, and you don’t change them when you know it’s going to be temporary! PERIOD!

Darn there are some DUMB politicians out there!

dominigan on February 8, 2013 at 11:44 AM

Anecdotal, of course, but we are certainly feeling the pinch.

Single-Income family with one child and another on the way (due in April).

Thankfully, my salary has allowed my wife to do as she was hoping to do – which is, be a stay-at-home mom.

But, we are definitely needing to cut back even further then we had.

RightWay79 on February 8, 2013 at 12:27 PM

I’m seeing a lot of conflicting data about consumer confidence. Bloomberg claims it is improving, but The Conference Board shows a sharp decline.

I disagree with Ed’s premise that ending the payroll tax cut will have no effect on the economy. That’s not to say I believe it should happened in the first place- defunding Social Security was the wrong way to cut taxes, and Ed is right that these temporary fixes are terribly inefficient. But the combination of higher food and gas prices and smaller paychecks will have an effect (not to mention the effect on those whose hours are being cut thanks to Obama care).

I would also note the Times is incorrect when it blithely dismisses the effect of tax hikes on the “wealthy”. The only reason the effect hasn’t shown up yet is because there was a lot of tax avoidance finagling going on the end of the year which temporarily boosted pocketbooks. Of course the Times will blame any economic downturn caused by these huge tax increases on cuts to government spending on social programs….

Buy Danish on February 8, 2013 at 12:35 PM

I take that back. The 2.9% of the Medicare is taken from my check as an employee as well. Sorry, everyone. (I do have another job as a direct employee and I just checked my pay stub.) So in other words, as contractor, I owe 6% more per dollar than you.

Kinda feel silly for complaining so loudly then. EVERYONE pays too much in FICA contributions.

JoseQuinones on February 8, 2013 at 12:36 PM

The payroll tax hike neutralized my entire raise for 2013. That having been said, payroll tax should never have been cut in the first place. Those are supposed to be contributions to entitlement programs that are already tanking, not regular old taxes that you can tinker with at will.

Outlander on February 8, 2013 at 12:41 PM

I enjoyed the “holiday”, but it was really part of Obama and Congress’s ignorance of good economic policy. Perhaps Obama thought it was a win for him because too many low-information voters thought “Yay, I have bigger paychecks because of Obama!” It might have helped him win re-election. Now they don’t and they are pi$$ed. And it’s gonna get worse for them when all of Obamacare’s taxes kick in next year.

22044 on February 8, 2013 at 12:51 PM

Let’s face it, that “extra” $20 went to pay for higher priced gasoline.

GarandFan on February 8, 2013 at 1:49 PM

The payroll tax holiday was never a stimulus for my family. All it served to do was allow us to prevent a further build-up in existing debt.

I’m still eagerly awaiting for the so-called disposable income to return to my budget, but it isn’t going to happen anytime soon….

Turtle317 on February 8, 2013 at 2:01 PM

Remember that this “painful new rate” is the same rate we’ve all been paying since 1990. 15.3 percent, when you include what your employer pays, and don’t kid yourself that isn’t coming out of his cost of employing you.

In short, you’ve been getting hit with this terrible “pinch” for twenty years.

When I started working as a teenager, the payroll tax rates were half what they are now.

When Social Security was sold to an eager public, the total rate was 2 percent.

Anybody else smell boiling frog?

tbrosz on February 8, 2013 at 2:04 PM

on February 8, 2013 at 2:04 PM

The “painful new rate” was set when the alarms started going off that the Ponzi scheme was doomed for failure. Even at the current rate everybody knew that it wouldn’t be enough but the needed rate would have caused a very deep divide between the takers and the givers…would have made for some very unpleasant Thanksgiving dinners with mom and dad.

teejk on February 8, 2013 at 2:52 PM

Ed, I am with the majority here right now that call you on this. It does hurt. Many of us do not make a lot of money so that extra 100 a month may not sound like a lot to you or some other folks, but it is to us surfs. Heck, gas has gone up 30+ cents the last 2 weeks here.

LOL and what is date night? Me and my wife had not had one of those for over 10 years ( gotta love kids ).

watertown on February 8, 2013 at 3:24 PM

I can’t keep it all straight.

forest on February 8, 2013 at 10:15 AM

Liberalism is curvilinear.

Barnestormer on February 8, 2013 at 10:31 AM

My collie says:

Liberalism is lot like the Mobius band. You can repeat the mantra of “Forward!” all you want, but you are not going to go anywhere except those places that you’ve already been.

CyberCipher on February 8, 2013 at 3:41 PM

So you forgot that the “holiday” was temporary (some people might suspect that it was in the run-up to the elections). And now it goes back to a rate that will certainly not fund what you will get in the future. Which I guess says you want other people to fund your future social security benefits even though they will likely not get a dime from it since the next step is “means testing”?

That sounds like “redistribution” to me.

teejk on February 8, 2013 at 5:00 PM

Why isn’t the opposition making more of this attack on the working class. Understand that all the baloney about raising taxes was about income tax, which the lower paid (and Warren Buffet) will never notice. But FICA hits the low-paid in the gut. Yes, Democrats did that to you! Still want to vote for them?

The phony stories about people still spending money anyway is to cover the real-life drama of taking home 2% less than they did the month before. That has a bigger consequence the less you earn.

virgo on February 9, 2013 at 4:49 AM