RPT-Americans feel austerity's bite as payroll taxes rise

* Payroll tax hike could suck $125 billion from households

* Higher taxes to keep economic growth lackluster

* Americans already cutting back on spending

WASHINGTON, Jan 13 (Reuters) - Americans are beginning to

feel the pinch from Washington's decision to embrace austerity

measures aimed at bringing down the nation's budget deficit.

Paychecks across the country have shrunk over the last week

due to higher federal tax rates, and workers are already cutting

back on spending, which will drag on the economy this year.

In Warren, Rhode Island, Ben DeCastro got his first paycheck

on Friday in which taxes on his wages rose by 2 percentage

points. That works out to about $30 a week.

"You sit back and do the calculation, and that's $30 I'm not

going to spend at a restaurant," said DeCastro.

He said he worries that people hit by higher taxes will

spend less at the chain of furniture stores where he works as a

marketing manager.

Politicians in Washington made much hubbub last week about a

bipartisan deal to soften or postpone some $600 billion in

scheduled tax hikes and government spending cuts. President

Barack Obama said the deal would shield 98 percent of Americans

from a middle-class tax hike.

Nevertheless, for most workers, rich and poor alike, taxes

went up on Dec. 31 as a temporary payroll tax cut expired. That

cut - a 2 percentage point reduction in a levy that funds Social

Security - was put in place two years ago to help the economy,

which was still smarting from the 2007-09 recession.

About 160 million workers pay this tax, and the increase

will cost the average worker about $700 a year, according to the

Tax Policy Center, a Washington think tank.

"It stinks," said Beverly Renfroe, an accountant for a

realty firm in Jackson, Mississippi. "I definitely noticed a


The pain will trickle through the economy over the next few

weeks. Already, the new rate of 6.2 percent has trimmed

paychecks for about half of the 200,000 employees whose

paychecks are processed by Advantage Payroll Services, a payroll

firm based in Auburn, Maine.


Economists estimate the payroll tax hike will reduce

household incomes by a collective $125 billion this year. Some

households could reduce contributions to retirement accounts or

other savings, but most are also expected to cut back on


That alone could reduce economic growth this year by about

0.6 percentage point, said Michael Feroli, an economist at

JPMorgan in New York City.

"The headwind to growth should be noticeable," he said.

Most mainstream economists say the government should still

be trying to stimulate the economy by lowering taxes or raising

spending to help bring down the 7.8 percent jobless rate.

Even Federal Reserve Chairman Ban Bernanke has said Congress

could consider short-term stimulus measures if they can be

coupled with a plan to tame the deficit over the long run.

But a consensus has emerged between Congress and the White

House that the federal government should step up the pace at

which it cuts the deficit, which ballooned during the recession.

That decision is having repercussions across the country.

In Bergenfield, New Jersey, Evelyn Weiss Francisco has put

off plans to upgrade her cell phone and thinks she might go to

fewer music concerts. A director at a public relations firm, she

thinks the higher payroll taxes will cost her about $1,000 this


Some Americans will also pay higher income taxes this year.

Congress and Obama let income tax rates rise for households

making more than $450,000 a year, a partial repeal of tax cuts

put in place under President George W. Bush. The wealthy will

also pay a new tax to help fund a health insurance reform passed

in 2010.

These will have a smaller impact on the wider economy

because they affect fewer people. But taken together, this

year's tax hikes could subtract a full percentage point from

growth, Feroli said.

Most economists see economic growth of roughly 2 percent

this year, a lackluster pace held back by the government's

austerity measures that is likely to do little to reduce


Failure to postpone government spending cuts due to begin

around March would slow growth more, further frustrating the

economic recovery.


The blow to the economy from the tax hikes will hurt the

most during the first half of the year as people adapt to their

smaller paychecks.

Consumer spending, which drives more than two thirds of the

economy, will likely grow at a mere 1 percent annual rate in the

first quarter, and 1.5 percent in the second, said Sven Jari

Stehn, an economist at Goldman Sachs in New York.

Nicki Hagen, who received her first reduced paycheck on Jan.

4 and then another on Friday, estimates the higher taxes will

shrink her paychecks by about $10 a week.

She has already started holding back from coffee-and-bagel

runs made by coworkers at the home improvement company where she

works as an office administrator in New York City.

She expects a much bigger hit to her family's income when

her husband gets his first paycheck for 2013 on Tuesday.

The two will then sit down and figure out how to budget

their money. They might cut cable channels, or take vacation

days when their daughter is out of school to save on babysitter


"This is going to affect our lives," she said.

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