Payroll tax increase bites middle class hardest

The first paychecks of the new year are now being delivered to workers or posted to their accounts this month and the Twitterverse is buzzing.


WASHINGTON, January 11, 2013 – The Market Maven has been sitting back and chuckling this week as he reads the emails, Tweets, and other varieties of twittering as what’s left of America’s middle class discovers just what they voted for on November 6, 2012. The first paychecks of the new year are now being delivered to workers or posted to their accounts this month and the Twitterverse is buzzing.

To wit: another 2% is being taken out of each paycheck—a substantial bite that few individual workers, apparently expected. That’s because the payroll tax cut, instituted two years ago as part of the Federal government “stimulus” plan, expired at midnight, January 1, 2013. This non-action was part of the so-called fiscal cliff legislation that did nothing to reduce spending while doing everything to raise revenue that’s already been spent.

Let’s roll back the tape for a minute. (Do  people even use tape any more for recordings?) Payroll tax is sort of a misnomer here, since the term “payroll tax” (or “payroll taxes” if you want to include all of them) refers to all the deductions your employer pulls out of your paycheck before you get what’s left. Things like Federal income tax withholding, state and local income taxes, FICA, whatever. Depending on which state you’re in, your mileage may vary.

The “payroll tax increase” that everyone is buzzing about specifically has to do with the FICA deduction from your paycheck, the one that allegedly covers the cost of Social Security and Medicare. The official rate has long been 6.2% of your gross pay (up to $110,100 of income each year) for Social Security plus another 1.45% for Medicare. Additionally, happening in background and virtually unknown by a surprising number of today’s employees, your employer kicks in an additional 6.2% of your gross pay, all on his/her own and without affecting what you see in your paycheck. How thoughtful.

At any rate, what was cut two years ago was the 6.2% that you were, um, contributing out of your paycheck for Social Security. In 2011 and 2012, that percentage was cut to 4.2%. Medicare remained level and your employer was still forking over his own 6.2% for your benefit without a cut. So what’s happened this month is that your two-year, 2% holiday on your Social Security tax—which had been reduced to 4.2%–has just gone away and now you’re back to the future, i.e., 6.2%.

Judging from the virtual howling across the Internet, the blogosphere, the Twitter-verse, and elsewhere, nobody apparently saw this coming, hard as that is to believe.

Tweets snagged recently by Michelle Malkin’s too-funny “Twitchy” site are too funny. Here’s a random, unedited sample derived from two separate posts at this site:

So excited for 2013 and the new blessings that will occur.. Not excited about the higher payroll taxes on EVERYONE…

Max Baucus says the tax deal approved by the Senate prevents an increase in tax rates for middle income Americans. It raises payroll taxes!

Did new taxes go info effect today? Something I don’t understand about the fiscal cliff? I got a raise, and yet my paycheck got smaller …

@BarackObama please explain why my paycheck was less this week than I normal. I thought “99% of households” wouldn’t see taxes raised

I thought Obama wasn’t going to raise taxes on the middle class, but my paycheck was down by 2 percent today. That Kind of hurts. Yikes!

Ah, first paycheck of the year, first view of my higher taxes. And people say the government can’t work fast.

Social security taxes want up. My paycheck is now smaller than it was before I got my raise. Joy.

My paycheck just went down by an amount that I don’t feel comfortable with. I guarantee this decrease will hurt me more than the increase in income taxes will hurt those making over $400,000.

This tweet sort of sums things up:

The price for having your head in the sand just went up.

But this one, likely contributed by someone from Gen X or Gen Y is sadly prescient and poignant at the same time:

Smaller paycheck thanks to social security that I will never see

Fox News is also on the topic, posting an article today that quotes former CDN conservative columnist Gabriella Hoffman who, like younger workers everywhere, is not exactly pleased with this effective pay cut.

“Hoffman, a 21-year-old Virginian who works at a nonprofit,” writes Joshua Rhett Miller, “estimates her paycheck will be roughly $30 less this biweekly pay period, or about $780 annually, thanks to the end of a two-year cut on payroll taxes, which fund Social Security. The tax has risen back up to 6.2 percent from 4.2 percent, costing someone making $50,000 annually about $1,000 per year and a household with two high-paid workers up to $4,500.

“’As a newly-graduated person, someone coming straight out of college, I don’t like the idea of having less money coming to me due to the selfish interests of people in Congress who don’t have any interest in reducing our financial problems,’ Hoffman told ‘This is an impediment for future economic growth. It’s going to make it harder for young people like myself to get married, find a better job, you name it.’”

Hoffman clearly understands what’s going on here. It’s not certain, however, that most young voters in her age cohort have arisen from their mental slumber.

Checking the Twitter-verse like us, Miller notes that “#WhyIsMyPaycheckLessThisWeek has been a trending topic as most U.S. workers have either already seen less green or are preparing to do so.”

What’s interesting about all the outrage is this:

  • By and large, not only so-called “low information voters” but also the college educated masses who voted for President Obama in November as if they were voting for “American Idol”—all seem somehow to lack even a clue that their socialist hero would raise taxes on everyone and continue to raise them. Listening to the mindless blather of rock stars, movie stars, and “personalities,” not to mention the state-run media, you can tell they figured only bad things would happen to the rich.
  • Ironically, the so-called payroll tax “cut” was actually an idiotic idea to begin with. Entitlements—particularly those big kahunas, Social Security and Medicare—are already disappearing into the twin black holes of debt and demographics. Cutting this particular tax for two years only ended up putting a greater long-term burden on these already chronically underfunded “entitlements.”

That said, never expect anything intelligent to come out of this government. Taxes have allegedly gone up for the rich who will, of course, happily go on evading the tax increases just imposed since none of the (legal) loopholes they customarily use to avoid said tax increases have effectively been touched—something the Republicans wanted but the Democrats and the President refused to discuss.

So now we get shock and outrage. We warned voters of the consequences of Election 2012 last fall. But we’d have to conclude that a significant majority of voters of all ages now get their political and economic news from MSNBC and Comedy Central rather than from us. We’d like to think these voters will reconsider their news choices now. But alas, we’re pretty confident that they won’t. No hugging, no learning. The Seinfeld Nation soldiers on.

Meanwhile, in that other den of iniquity known as Wall Street, the market is meandering today with a mildly negative tone that, we expect, will get more negative as the market’s 4 p.m. close approaches. Nimble traders have made a few bucks this week but, desirous of keeping those bucks, started selling profitable 2013 positions yesterday (as did we), a trend that’s continuing today.

The fact that options expirations are occurring next week isn’t helping the market’s attitude. Expecting “unexpected” disappointments during the current earnings season which started Tuesday, traders are likely to make next week’s market antics more frantic than is already usual during weeks like this.

Options expirations weeks are more often bullish than bearish. But we expect a mixed-to-down bag next week, largely because nervous institutions and investors might be booking profits and heading to the sidelines as Fiscal Cliff II debating—involving entitlement cuts (actually, slowdowns in the rate of increase) that Republicans want but will never achieve—begins in earnest.

The wild rumpus will likely commence when the President’s annual joke budget arrives on Capitol Hill, wrapped in its usual DOA status, in early February. This massive waste of dead trees will likely be accompanied by a predictably nasty State of the Union Address that will put to permanent rest any Kumbayah opportunities for this session of Congress.

Lighten up your load of stocks and bonds as opportunities present themselves. The worst is yet to come.

That said, have a good weekend.

UPDATE: We’re surprised but delighted at the number of comments this piece has generated, both positive and negative. It’s encouraging to see that at least some folks are still engaged in the ongoing fiscal debates.

Moving ahead, please note:

  • Reading past the gobbledygook that will be put out by both parties for the next two months, tuning out the uninformed lunacy that passes for network news today, and refusing to give any credence at all to the pronouncements of movie stars and rock stars – all part of the 1%, BTW, and proud of it – will help clear your personal space.
  • Start reading the news and views posted on the more credible sites of evolving Internet journalists. Read both sides of the issue, then split the viewpoints roughly down the middle. This won’t get you to the absolute truth, but it will get you close to it.
  • Dogmatically believing in the secular catechisms put out by either side of the political debate is a recipe for national disaster.

Happy Saturday!

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.

Any positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.

Follow Terry on Twitter @terryp17


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