How Will The Payroll Tax Hike Affect You?

According to the Washington Post, the payroll tax hike that took effect on January 1 likely just wiped out any improvement you made in your income over the past year.  If you’re a median-wage single person, you’re likely to bring home around $900 less this year than you did last year. An upper-middle class, two-breadwinner family can, toward the high end, lose up to $4000 in income.

Now this is not technically a tax hike — it’s actually the end of a tax cut — but we’ve had a couple of years to get used to it, so we still feel the pain. Importantly, the payroll tax holiday implemented in January 2011 was one that seemed to directly result in more disposable income for a lot of people; the Federal Reserve said that the average American spent about 33% of the money they received from the cut — far more than many similar programs.

That means that not only are you going to feel the hurt in your wallet, but it’s quite possible that the sudden loss of all that money moving around the economy at large may result in what the experts call a ‘contraction’ — a mini-recession in the middle of a larger downturn. Generally, prices take longer to respond to a contraction than spending money does, so you can expect the first quarter of 2013 to be noticeably tighter financially than the last quarter of 2012.

What can you do about it?  There’s really only one option; choose things you can do without, and do without them.  Wash your clothes in cold water.  Wait an extra couple of weeks for your haircut. Skip the soda with your lunch. Bottom line – whenever Uncle Sam decides to keep more of what you earn, you need to make lifestyle adjustments to compensate for it.

Hopefully, the recent drop in fuel prices will continue providing some relief. Additionally, in a recession, prices on other goods and services tend to stagnate or drop, which should also help offset the drop in take home pay in the long run.

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