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Consumer spending may outweigh payroll tax cuts

Pay raises take a cut

TEXT OF INTERVIEW

JEREMY HOBSON: So -- is your paycheck any bigger this month? If it is, that might be a result of the new federal tax cuts that were passed right before the end of the year. Though for many people, those cuts haven't gone into effect yet, because of the time it takes payroll processors to absorb them. Still, we wanted to find out what those cuts are going to mean for American workers and just how much we'll feel them.

So let's bring in LA Times consumer columnist David Lazarus. Good morning.

DAVID LAZARUS: Good morning.

HOBSON: So are we about to start feeling really rich with this big payroll tax cut coming through?

LAZARUS: Well to put it in economic terms, not so much. And the reason for that is kind of two-fold from the consumer's point-of-view. On the one hand, yeah we're going to get a little cut in payroll taxes, but at the same time, gas prices are going up. It's already gas prices above $3 a gallon nationally; here in California where I am, it's about $3.20 or so. And with all that unrest in the Middle East, we're already seeing oil prices going up. So the prospect of $4.00 a gallon -- not exactly unreasonable. That's going to be a big bite in a lot of people's money. And at the same time, we have the Department of Agriculture coming out the other day and saying food prices could rise as much as 3 percent this year, and that's a very big deal. In fact, McDonald's, of all people, just the other day announced that the price of Quarter Pounders and Big Macs and all the rest could be going up very soon, because their grocery bill for beef and cheese and whatnot is also rising.

HOBSON: All right, so prices of the things that we buy are rising. But the economy's getting better, right? So shouldn't we have a little bit more money to spend on these higher-priced goods?

LAZARUS: You've got to parse the numbers again, Jeremy. For instance, the Commerce Department came out the other day and said earnings are up an incremental 0.4 percent, which sounds good. But they also said that spending is up 0.7 percent. Now that's a good thing, because of, you know, consumers count for a whole lot of economic activity. But when earnings are up a little bit, and spending is up a bit more, the only thing that means is savings is going down. And you know what that means, Jeremy?

HOBSON: We're putting it on the credit card.

LAZARUS: We're putting it on plastic. So if you're in the credit card game, this is a good time for you.

HOBSON: All right, but back to this payroll tax cut, David. Are you saying that it really doesn't mean anything for us?

LAZARUS: I wouldn't go that far because the stimulus is going to be holding off even worse economic prospects. So for that extent, that's a good thing. But does it get us out of the woods any faster? I'm not so sure about that.

HOBSON: L.A. Times consumer columnist David Lazarus. Thanks so much.

LAZARUS: Thank you.

Log in to post4 Comments

I, too, noticed that my paycheck is not any bigger. Well, it's actually $7.00 more after subtracting the Federal hike. My husband's social security taxes went down $50, but his Fed went up $35. Not really the windfall we were hoping for.

I just got my paycheck and an additional $17. was removed for Federal Income Tax. I called the City Treasurer who said she was working by the new tax tables issued 1-10-2011. Her pay was also reduced, by $20. So 'what payroll tax cut?"

Gentlemen,
Change in spending > Change in income
does not necessarily mean increased borrowing; it means decreased saving.
After months of consumers paying down debt, if they decreased the rate of paying down debt it would look like these latest numbers.

Take care,
Rick

I'm the payroll manager for three companies. This is just anecdotal, but I had a call from an employee the other day asking why her net pay was lower than the previous month. Her earnings did not change, her voluntary deductions did not change, her W-4 and NC-4 elections did not change. Her SS tax went down, but because the tax tables had changed, her FIT went up. I guess she would have been worse off if she hadn't had the 2% cut in SS tax, but it was just taken away by the new tax tables. Were the tax table changes deliberate or were they revised before the SS reduction was ever debated?

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