What if they threw a big tax hike, and nobody noticed?
On January 1, a new set of allegedly confidence-killing, consumption-destroying, investment-unfriendly taxes hit the economy. The payroll tax rose from 4.2 percent to 6.2 percent on the first $113,700 of income. The top marginal rate rose from 36 percent to 39.6 percent for families with adjusted gross income above $450,000. Taxes on capital gains and dividends for those same top earners rose from 15 percent to 20 percent. Meanwhile, the Affordable Care Act levied an additional 3.8 percent tax on investments, and an additional .9 percent Medicare payroll tax on families with adjusted gross income of more than $250,000.
The notion was that putting these taxes on the rich and middle-class, taxing income and investments, at a time when the economy was going at a painfully slow rate, would cause people to stop spending and investing, go Galt, and send the economy into a recession. To read the Wall Street Journal editorial page, you would have thought Hugo Chávez had been named to succeed Barack Obama.
But three months into this new experiment in extremely mild socialism, it seems like Americans are generally shrugging off the tax increases. A survey released this week by Bankrate.com found that “more than half of working Americans either haven’t noticed (48 percent) or have been unaffected by (7 percent) the January 1 expiration of the payroll tax cut.” Some 30 percent said they’ve reduced spending, while 11 percent are saving less as a result. Bankrate.com analyst Greg McBride noted that “the lowest-income households were the least likely to have cut back on spending and the most likely not to have noticed the change in the payroll tax.”
Of course, surveys measure feelings and intentions, not actual activity. But pretty much every consumer indicator has continued to tick up through the first few months of 2013—all in the face of higher taxes. Home sales and auto sales have risen smartly in the first two months of the year. Overall retail sales in January and February were up 4.3 percent from the first two months of 2012. The ICSC/Goldman Sachs index of chain-store sales has been chugging along.
Sure, Walmart has complained of poor sales. “Where are all the customers? And where is their money?” read a plaintive internal Walmart email that surfaced in February. But Walmart has been struggling for the last several years, before and after the tax cut, as its core consumers cope with low wages. And as Renee Dudley at Bloomberg reported Tuesday, another factor may be at work. Her article argues that the company has scrimped so much on labor and labor costs that its shelves aren’t sufficiently stocked. And that is pushing customers to take their money elsewhere.
If anything, the economy on the whole has been strengthening since January 1. The forecasting firm Macroeconomic Advisers now says the U.S. economy, which grew at an anemic pace in the fourth quarter, is expanding at a 3.2 percent rate in the first quarter—and that includes the initial effects of the sequester.
How can this be? Well, the payroll tax increase is a somewhat sneaky one. The difference shows up in a slightly lower amount credited to bank accounts every two weeks. And while a payroll reduction of $50 every two weeks is meaningful for many people, most workers are accustomed to changes in their net pay—due to the cost of benefits, changes in retirement account contributions, increases in state and local taxes, or deductions for other items like commuter tickets. Meanwhile, the very wealthy who have been hit with higher taxes can easily weather the storm. If you have an annual salary of $1 million, your biweekly paycheck will be about $38,000. Whether you wind up with $20,000 after taxes and deductions every two weeks or with $19,000 after taxes and deductions every two weeks won’t put much of a crimp in your day.
On the whole, however, the good things happening in the economy are more powerful than the drag of higher taxes. Nearly 2 million more people are working today than there were a year ago. Companies are adding new jobs to their payrolls at a rate of 50,000 per week. Salaries and wages are up about 2 percent over the past year. So for most employees, the higher payroll tax means they’re basically earning the same amount they were a year ago. And people are generally feeling more wealthy thanks to the soaring stock market and rising housing market.
There’s no question that the higher tax rates are taking more money out of the pockets of individuals. Revenues are flooding into the Treasury Department. In the first two months of 2012, Treasury collected $394 billion in cash, up from $337 billion in the first two months of 12—an increase of $57 billion, or nearly 17 percent. That trend has continued through March, according to the Daily Treasury Statement. But so far, at least, American consumers apparently have more than enough money coming in, or saved in the bank, to keep spending.