Home > A3 > Payroll Tax Ending Possible Effect On GDP

Payroll Tax Ending Possible Effect On GDP

Congress passed a payroll tax which was in effect in 2011 and 2012 was not renewed this year.  After the tax was passed it lowered the amount taken from people’s paychecks from 6.2% to 4.2% and thus the average family earning $50,000 a year was given an extra $1,000 to spend and put back into the economy.   After the fiscal cliff deal this January this act was not renewed and taxes were raised for higher-income families as a part of the compromise.

With the full tax rate back families are being forced to once again cut back on their spending by $720 reported by the New York Fed’s survey.  They also reported that during the tax cut families ended up spending $380 of the money they saved from the tax cuts.

ImageFamilies that are lower-income are going to be forced to cut back on their spending even more.   While higher-income people will cut back 64% while lower-income reduce it by 77%.  The New York Fed stated that they considered lower-income families to have an annual income of $75,000 or less.  People who were earning more than $75,000 were reported to have spent the money that they saved from the tax cut whereas they lower-income tended to spend that money paying off debt.

No one is able to really tell how the new increase in taxes will affect people’s spending it can be inferred that the average family is likely to cut back on how much they spend.  But if families do decide to cut back on spending it is likely to only have a negative effect on the United States GDP.  Forcing the government to either spend more to help improve the GDP or to lower taxes and hope that citizens will go out and spend the money they would have given the government in taxes to help improve the economy.

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