The Difference 2% Makes

When she opened her statement from Payroll,
Unaware of how Washington may roll,
She had to recount
The take-home amount:
"My disposable income's gone AWOL!"

In Washington and on Wall Street, we're all talking about the looming sequester, but many Americans are still waking up to the impact that the New Year's Fiscal Cliff deal has had on their take-home pay.  The most consequential component of that deal - the non-renewal of temporary payroll tax cuts - has reduced the net wages of every American by 2% of their gross wages.  In other words, thanks to the resumption of the 6.2% payroll tax rate from 4.2%, if you make $100,000 a year, you're now cashing $2,000 less per annum.  Considering that per capita discretionary income (defined as the amount remaining after monthly bills and other necessary spending are deducted from after-tax income) ranges from $7,000 to $9,000 across the United States, such a net wage reduction makes a big difference.

You wouldn't know this from recent reports, however. Typical is a story heard yesterday on NPR, which asks if it's "too soon to blame payroll taxes for stagnant retail sales?" Although downscale companies from Burger King to Walmart are attributing weak sales to the payroll tax hike, or forecasting weakness on account of it, retail sales did not fall in January overall. (It should be noted that this flat trend follows a weak December.) The public radio report quotes Christopher Carroll, an economics professor at Johns Hopkins University: "He says that while it's likely smaller paychecks will affect spending eventually, we just don't know yet." Auto sales have also started the year strongly, fueled by cheap credit and the need to replace an aging fleet of cars. However, no matter how delayed the effect of reducing discretionary income, simple arithmetic says it must be felt soon, if it hasn't been already.