Americans Feel Austerity’s Bite As Payroll Taxes Rise


credit-cardAmericans are beginning to feel the pinch from Washington’s decision to embrace austerity measures aimed at bringing down the nation’s budget deficit.

Paychecks across the country have shrunk over the last week due to higher federal tax rates, and workers are already cutting back on spending, which will drag on the economy this year.

In Warren, Rhode Island, Ben DeCastro got his first paycheck on Friday in which taxes on his wages rose by 2 percentage points. That works out to about $30 a week.

“You sit back and do the calculation, and that’s $30 I’m not going to spend at a restaurant,” said DeCastro.

He said he worries that people hit by higher taxes will spend less at the chain of furniture stores where he works as a marketing manager.

Politicians in Washington made much hubbub last week about a bipartisan deal to soften or postpone some $600 billion in scheduled tax hikes and government spending cuts. President Barack Obamasaid the deal would shield 98 percent of Americans from a middle-class tax hike.

Nevertheless, for most workers, rich and poor alike, taxes went up on December 31 as a temporary payroll tax cut expired. That cut – a 2 percentage point reduction in a levy that funds Social Security – was put in place two years ago to help the economy, which was still smarting from the 2007-09 recession.

About 160 million workers pay this tax, and the increase will cost the average worker about $700 a year, according to the Tax Policy Center, a Washington think tank.

“It stinks,” said Beverly Renfroe, an accountant for a realty firm in Jackson, Mississippi. “I definitely noticed a decrease.”

The pain will trickle through the economy over the next few weeks. Already, the new rate of 6.2 percent has trimmed paychecks for about half of the 200,000 employees whose paychecks are processed by Advantage Payroll Services, a payroll firm based in Auburn, Maine.


Economists estimate the payroll tax hike will reduce household incomes by a collective $125 billion this year. Some households could reduce contributions to retirement accounts or other savings, but most are also expected to cut back on spending.

That alone could reduce economic growth this year by about 0.6 percentage point, said Michael Feroli, an economist at JPMorgan in New York City.

“The headwind to growth should be noticeable,” he said.

Most mainstream economists say the government should still be trying to stimulate the economy by lowering taxes or raising spending to help bring down the 7.8 percent jobless rate.

Even Federal Reserve Chairman Ben Bernanke has said Congress could consider short-term stimulus measures if they can be coupled with a plan to tame the deficit over the long run.

But a consensus has emerged between Congress and the White House that the federal government should step up the pace at which it cuts the deficit, which ballooned during the recession.

That decision is having repercussions across the country.

In Bergenfield, New Jersey, Evelyn Weiss Francisco has put off plans to upgrade her cell phone and thinks she might go to fewer music concerts. A director at a public relations firm, she thinks the higher payroll taxes will cost her about $1,000 this year.

Some Americans will also pay higher income taxes this year. Congress and Obama let income tax rates rise for households making more than $450,000 a year, a partial repeal of tax cuts put in place under President George W. Bush. The wealthy will also pay a new tax to help fund a health insurance reform passed in 2010.

These will have a smaller impact on the wider economy because they affect fewer people. But taken together, this year’s tax hikes could subtract a full percentage point from growth, Feroli said.

Most economists see economic growth of roughly 2 percent this year, a lackluster pace held back by the government’s austerity measures that is likely to do little to reduce unemployment.

Failure to postpone government spending cuts due to begin around March would slow growth more, further frustrating the economic recovery.


The blow to the economy from the tax hikes will hurt the most during the first half of the year as people adapt to their smaller paychecks.

Consumer spending, which drives more than two thirds of the economy, will likely grow at a mere 1 percent annual rate in the first quarter, and 1.5 percent in the second, said Sven Jari Stehn, an economist at Goldman Sachs in New York.

Nicki Hagen, who received her first reduced paycheck on January 4 and then another on Friday, estimates the higher taxes will shrink her paychecks by about $10 a week.

She has already started holding back from coffee-and-bagel runs made by coworkers at the home improvement company where she works as an office administrator in New York City.

She expects a much bigger hit to her family’s income when her husband gets his first paycheck for 2013 on Tuesday.

The two will then sit down and figure out how to budget their money. They might cut cable channels, or take vacation days when their daughter is out of school to save on babysitter expenses.

“This is going to affect our lives,” she said.

Read more at REUTERS.

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  1. im watching the USA economy situation getting worse & worse While its heading towards collapse & bankruptcy.

    if you want to save yourself now then head towards Eretz Yisroel ASAP. Don’t wait until you have nothing left C”V & then say lets go-the economy is better in Eretz Yisroel-go now before you are holding in that category of people.

    I wish everyone Hatzlacha

  2. no. open up a zecharia Hanavi (the prophet) & see if you can figure out why not. look at what Hashem told zecharia in the list of events that will occur before Mashiach comes.
    once you find the one i’m talking about you will also not be concerned .CAUSE THEN YOU WILL SEE HASHEMS SIDE OF THE STORY. (in order for that prophecy to come true, frum yidden need to be drafted into the army….. look up the rest)


    if you still cannot find it you can contact me at

  3. Oh I see, you are (R”L) much smarter than our gedolim who are worrying for nothing, and you also must have a red phone in your house, direct line with HKBH, I wonder if it’s a videophone and the two of you talk face-to-face.

    I wish you a refuah shleimah.

  4. <b”4. Comment from reader
    Time January 13, 2013 at 4:25 PM

    Oh I see, you are (R”L) much smarter than our gedolim who are worrying for nothing, and you also must have a red phone in your house, direct line with HKBH, I wonder if it’s a videophone and the two of you talk face-to-face.

    I wish you a refuah shleimah.

    Really “reader,” sarcasm is truly the lowest form of wit – and try as yo might have done you could not make even to that low level.

    Just what was the point of your comment? because

  5. Ben-Azai, looks like you are missing what is going on, so I will spell it out. There is a shabtai-like cult, which believes that the “geulah” will be reached R”L by getting rid of our current “old” gedolim and by returning en masse to EY, not as a Torah state but as a right-wing state which pursues aggressive policies towards our neighbours, this would also justify mass draft and molding of draftees. They look forward to the destruction of Torah in Brooklyn and elsewhere in Ch”L, and to the destruction of Torah in EY which they consider R”L the root of all evils, such as the Aza disengagement. They particularly R”L despise and hate Rabbi Elyashiv Z”L and Rabbi Ovadia Yosef shlita. I am sure you agree that no legitimate Jew should dare speaking against such gedolim, whatever their haskhafa is. Please reread comment #3, when this person not only denies draft is a terrible gezeira, but actually says it is “what needs to happen” and R”L “Hashem’s side of the story” (as opposed to R”L our Rabbi’s side of the story). Whom do we believe? Rabbi Ovadia Yosef who is telling us the draft is a harsh decree, or the anonymous baal teshuva who claims he knows better?


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