US citizens feel austerity's bite as payroll taxes rise

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 US$30 a week.

“You sit back and do the calculation, and that's US$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 US$600 billion in scheduled tax hikes and government spending cuts. President Barack Obama said 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 Dec. 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 US$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.

'Headwind to growth'

Economists estimate the payroll tax hike will reduce household incomes by a collective US$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.

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