Payroll Tax Saps Consumer Confidence

That shocking little pay cut we all took at the beginning of the year is being blamed as the reason why consumer confidence suffered a drop so large it wiped out all the gains registered in 2012.

The Washington Times is reporting that the end of the payroll-tax cut holiday that resulted in carving an unexpected slice of cash out of employee paychecks in January to fund Social Security has had a dampening effect on the confidence most Americans have about the U.S. economy. The tax holiday, enacted by former President George W. Bush which saved American workers two percent of their pay, ended with the passage of the fiscal cliff deal and appears to have taken most Americans by surprise.

“Amid all the publicity about a $650 billion tax deal between Congress and the White House at the end of the year, some people apparently were expecting only ‘tax hikes on the rich’ trumpeted by the media,” the Times reports.

“The irony is the tax cut was noticed more in its absence than in its presence. Surveys at the time it was enacted showed that many consumers weren’t even aware of an increase in their take-home pay. But after two years of spending the extra cash from week to week, consumers clearly were missing the spare change, which added up to about $1,000 a year for the average taxpayer.”

As a result, the confidence index fell to 58.6 in January from 66.7 in December, its lowest level in 14 months.

With the new year off to such a disappointing start, economists say this loss of confidence will impact consumer sentiments about jobs, finances, home-buying and auto purchases.

“This is a major deterioration in confidence,” said Chris G. Christopher, an economist at IHS Global Insight who called the loss of confidence a “super-bad” development. “The new year has not started on a cheerful note. And consumer mood falls faster than it rises.”

Matthew Shay, president of the National Retail Federation, told the Times the loss of confidence will likely impact consumer spending in the coming year just as it did in the last six weeks of 2012 when record sales around Thanksgiving fizzled into a weak showing at the close of the holiday shopping season.

“What we witnessed during the holiday season is an indication of what we are likely to see in 2013. Consumers read troubling economic headlines every day and look at their bottom lines at the end of the month, and they don’t like what they see,” he said.

“Pushing fiscal policy decisions down the road will lead to even greater uncertainty, and will continue to impact consumers’ desire and ability to spend on discretionary items. The administration and Congress need to pursue and enact policies that lead to growth and economic expansion, or it could be another challenging year for retailers and consumers alike.”

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