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NY Fed Survey: End of Payroll Tax Cut Prompting Consumers to Scale Back Spending

“The end of the payroll tax holiday is prompting consumers to cut spending, according to a new survey from Federal Reserve Bank of New York.

Of the 370 individuals surveyed, 79 percent said they plan to cut spending in response to the end of the tax cut, while nearly 20 percent said they will cut savings and 2 percent will increase debt (borrowing).

The payroll tax cut reduced Social Security and Medicare taxes withheld from paychecks by 2 percent in 2011 and 2012, impacting 155 million workers. It gave an extra $1,000 a year to the average household earning $50,000.

The economists compared how people had used the extra money with what they say they’re doing in response to the end of the tax.

“We see a disproportionate shift toward primarily reducing spending,” New York Fed economists Basit Zafar, Max Livingston and Wilbert van der Kaauw write in their report. “Regardless of what consumers reported doing with the increase in take-home pay over the last two years, a majority report that they will cut back on spending.”

For example, 86.2 percent of those who mostly spent the extra money said they now plan to mostly cut spending, and 80 percent of those who used the extra funds mostly to pay off debt also plan to mostly reduce spending. ….”

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