Friday, December 16, 2011

Real-life impact of a payroll tax increase

By Martha C. White

Sometimes it's the little things that sting the most. For Danny Kofke, a special-needs schoolteacher in the suburbs of Atlanta, the expiration of the payroll tax cut at the end of the year will mean taking his wife to Subway instead of a sit-down restaurant on their twice-monthly date nights. It will mean not buying his two daughters new clothes without careful planning and trimming elsewhere from the family's monthly budget, and skipping fresh blueberries and salmon at the grocery store. "It definitely will impact us," he said.

Economists have been warning for weeks that letting the payroll tax cut expire at the end of the year will deliver a blow to the economy, consumer spending and job creation ? and possibly put the United States' credit rating back in jeopardy. But the pundits have been silent on how American families will be affected by letting the 4.2 percent tax on the first $106,000 in earnings revert back to 6.2 percent.?

According to the Economic Policy Institute, the average household had $920 more this year thanks to the cut, money that's going to evaporate from paychecks starting in January unless Congress passes an extension. President Barack Obama's proposal, also considered unlikely to pass Congress, would halve the 6.2 percent tax and give families an average of $1,500 in 2012.?

Kofke said the tax cut gave his family some breathing room this past year. "It?definitely helps because then we have more to spend on a weekly basis," he said. For 2012, his take-home pay will shrink even further without an extension of the cut, he added, because his health insurance premiums are going up by 15 percent.?And it means there probably won't be a Christmas vacation for the family next year, even though Kofke admits his tastes are modest; this year, the family is renting a cabin for a frugal getaway.

The kicker is that Kofke is no slouch when it comes to budgeting: He's written two books on family spending and money management.?This doesn't shield him from the week-to-week impact of the expiration, though.?"The difference is about $70 a month for us. For us, living on a teacher's salary, that's a decent amount of money."

"So many of us are on the edge with just enough to get by," said?Roberton Williams, a senior fellow at the?Tax Policy Center. "People are worried about making ends meet. ... If you've got a little more money in the bank account at the end of the week, you're more likely to spend that money."

That was the intention of the tax cut, which Williams said funneled an extra $112 billion into the anemic economy this year; rather than giving people a one-time credit or lump-sum payment, boosting their paychecks by a relatively small amount every month would encourage them to spend those dollars rather than sock it away or use it to pay off existing debts.?"In a $14 trillion economy it's less than 1 percent, but at the margins it can make the difference between the local Pizza Hut making it or not making it," he said.?

Williams said taking away that incremental consumer spending next year puts another drag on the economy and the prospects for reducing the 8.6 percent unemployment rate. Conversely, Obama's proposal for a 3.1 percent payroll tax would inject another $180 billion into consumers' hands ? and cash registers ? around the country.?

If that idea were to become law, Kofke said his family would get roughly $1,300 more over the course of the year. "That's $100?a month. That's a week's worth of grocery shopping right there," he said. "That could be a nice summer vacation."?

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Source: http://bottomline.msnbc.msn.com/_news/2011/12/09/9328382-canned-salmon-frozen-berries-the-real-life-impact-of-a-payroll-tax-increase

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