Posted by Neil Irwin
January 11, 2013 at 11:33 am

Many Americans received their first paycheck of 2013 today. That sound you hear is the collective “What the . .. “ they have emitted upon looking at their pay stub.

For all the self-congratulatory back-patting from the White House and Congress on the deal that averted the “fiscal cliff” of tax increases—the deal locked in the George W. Bush-era tax cuts for households making under $450,000—they tended not to mention what the deal did, or rather didn’t do, on the payroll tax. A 2 percentage point reduction in the Social Security tax, which hits all American workers, had been enacted at the end of 2010. In the fiscal cliff deal, Congress and President Obama neither extended it further nor agreed on any other policies that might have the similar effect of leaving more money in workers’ pockets.

The numbers, for anybody who hasn’t checked their paycheck yet (or won’t get paid in 2013 until later in the month): For someone who makes the U.S. average for private sector workers of $818.69 a week and is paid every other week, that adds up to a reduction of $32.75 in each paycheck. For higher earners, anyone making over $113,700 annually, each bi-weekly paycheck will decline by $87.46.

The increase in payroll taxes has now gone from being an abstraction in Washington policy debates that politicians prefer not to talk about to being something very real.

The big question for the economy as 2013 gets underway is how America will react to their smaller paychecks. It is uncharted waters in many way: For most of the last two decades, taxes have been steadily falling. There is not much evidence for just how much Americans will pare back in response to tighter times and a higher tax burden.

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