Most of the $110B Payroll Tax Cut of 2011 is Being Diverted to Food and Energy Costs

By @ibtimes on

Economists were very quick to ratchet up 2011 GDP estimates to the 3.5 to 4.0% range, once the bipartisan compromise to give away almost everything both the GOP and Dems wanted passed late in 2010, to the tune of some $800B over 2 years.  Part of that package was the 2% temporary payroll tax cut - costing roughly $110B.  Essentially this increased the income of every worker by 2% as of Jan 1, 2011 for a period of a year.  One only wonders what sort of dogma will be spun next fall/early winter when this tax is slated to go back up from 4% to 6% and the chirping begins about putting the American people through a tax hike.

Either way due to the it's not inflation in food and energy, the first few months of 2011 has seen much of that 2% pay raise go directly back to the producers of gas and oil.

Via AP:

  • Americans are earning and spending more, but a lot of the extra money is going down their gas tanks. Gas prices have drained more than half the extra cash Americans are getting this year from a cut in Social Security taxes.
  • Unlike some other kinds of spending, paying more for gas doesn't help the economy much. Most of the money goes overseas, and higher prices leave people with less money to buy appliances, computers, plane tickets and other things that can be postponed.
  • Consumer spending jumped 0.7% last month, and personal incomes rose 0.3%, the Commerce Department said Monday. Both gains reflected the cut of two percentage points in the Social Security tax, raising take-home pay.
  • After adjusting for (government reported!) inflation, spending rose just 0.3%. After-tax incomes actually fell 0.1%.
  • The Social Security tax cut will give most households an additional $1,000 to $2,000 this year. In December, when President Barack Obama signed it into law, economists predicted higher take-home pay would lead to more spending and stronger economic growth.
  • But gas prices have jumped more than 50 cents a gallon this year.
  • ... much of the anticipated benefit from the tax cut will be lost. Christopher estimates half to two-thirds of the extra cash will ultimately go toward higher gas prices. Food prices have also risen in recent months, he noted.
  • Most people don't have the luxury of deciding to buy less fuel. They have to get to work. So they spend more on gas, and less on other goods and services -- from household purchases to restaurant meals to vacations -- that do more to drive U.S. economic growth.  (hence why all the QE is great for the stock holder class, but yet another knife in the back of the bottom 60%+ of the country)
  • Ultimately, less spending can hurt job growth because businesses will feel less confident. Christopher said a rise of just 25 cents a gallon in gasoline prices, if it persisted for an entire year, could cost the economy 270,000 jobs. (which again, is against the supposed purpose of QE - but if you listen to the Fed they tell you their studies indicate QE1+QE2 created 3M jobs)  [Jan 11, 2011: Fed's Yellen - QE1+QE2 to Create 3 Million Jobs]
  • Economists are lowering expectations for the January-to-March quarter. Paul Dales, senior U.S. economist at Capital Economics, said consumer spending will likely grow only 2 percent to 2.5 percent in that stretch. That would be down sharply from the 4 percent increase in consumer spending in the October-December period, the fastest pace in four years.
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