More money is coming your way. Surprised?
Little-noticed payroll tax cut could prod spending
“What?’’ said the professor waiting for a train at South Station. “I get extra money?’’ asked the mom with her son. “I didn’t realize that,’’ said the guy getting his shoes shined.
Three weeks after a payroll tax cut took effect, few people are noticing the extra money — $40 a week for some, $10 to $30 a week for most — that Congress put in their paychecks. It was part of a compromise reached last year to extend Bush-era tax cuts and unemployment benefits.
“What tax cut are you talking about?’’ asked Michael Berry, a 43-year-old Princeton University professor traveling through Boston.
That is exactly the reaction many economists were hoping for, said Bill Gale, codirector of the Tax Policy Center, a think tank in Washington. The tax cut was designed to get consumers to spend when the economy needs it. Returning money in barely noticeable increments, rather than sizeable one-time payments, makes it less likely people will sock it away in savings.
“We’re in this vicious cycle where people won’t spend because they’re worried about their jobs, and businesses won’t create jobs because they’re worried that consumers won’t spend,’’ Gale said. If workers don’t realize they are getting paid more, he said, “they are not recalibrating [their income], they are just spending what is coming in.’’
And that stimulates the economy, Gale added. Consumers drive more than two-thirds of the nation’s economic activity, and cautious spending by US households has contributed to the lackluster recovery. All told, the payroll tax cut is expected to pump $112 billion into the economy, boosting both consumer spending and the rate of economic growth by about a half percentage point this year, according to IHS Global Insight, a Lexington forecasting firm.
American workers started getting the extra money after Congress and President Obama agreed to reduce payroll taxes paid into Social Security to 4.2 percent from 6.2 percent. Taken alone, that cut means workers earning $50,000 a year will get about $20 more per week in their paycheck, while someone making $100,000 a year will get about $40 more each week. Social Security taxes are levied on just the first $106,800 of income.
But as with many political compromises, there is give and take. In this case, Congress gave the payroll tax cut, but took back a tax credit that paid workers up to $400. That credit expired at the end of last month, and its loss drops the net amount of extra money most people receive to roughly between $10 and $30 a week.
Waiting for a train in South Station, Matthew Barbour, 43, of Sandwich, said he counted about $10 more in his paycheck. His wife, Paula, noticed about $15 extra in her check.
“It’s going in my gas tank,’’ she said.
Across the waiting area, Marianne Farrington waved a yellow cup from Au Bon Pain cafe to indicate what she would do with whatever extra cash she received.
“I’m buying a cup of coffee,’’ the 55-year-old from Acton said. “It’s not going anywhere [new]. We’re doing the stuff we always do: save, buying groceries.’’
As he offered up a handful of bills to pay for the new shine on his loafers, Westwood resident Bob Soucy joked with the shoeshine guy, “Here, Bush tax cuts.’’
“I didn’t realize I was getting extra money,’’ the 48-year-old salesman said. “My paycheck is variable so it would be difficult for me to notice.’’
Workers who have their pay deposited directly in banks are even more likely to overlook small increases, said Buz Aaron, an accountant with Coles & Bodoin LLP in Needham.
“They check their direct deposit [slip] and if it looks close, they move on,’’ he said. “Twenty bucks a week most people are going to blow buying coffee, soda, and things you can’t even account for.’’
David Feeley, a Wakefield accountant, said he is telling clients to use the extra money to increase contributions to their 401(k) retirement plans. His reasoning: $20 a week is so small, no one will miss it, but it will add up if socked away. Still, he admits, most will likely ignore the advice.
“If I tell 200 of my clients,’’ Feeley said, “10 of them will probably do that.’’
But first, people have to realize they are getting the extra dough.
“Now that you’ve told me, I’ll pay attention,’’ said Massamaesso Kpikidao, a 37-year-old mother from Worcester. “I can save for my son’s college.’’
Erin Ailworth can be reached at email@example.com.