The Payroll Tax Hike Isn't Slowing Retail Sales
The January expiration of the payroll tax cut has yet to have a noticeable impact on spending, according to a new report by High Frequency Economics' chief U.S. economist Jim O'Sullivan.
From his latest note:
"...despite the payroll tax hike on January 1, retail sales appear to have been resilient.
A gain in non-auto, non-gasoline retail sales in this week’s report for January is being signaled by company data, with the caveat that the number of companies that publicly report results on a monthly basis has been declining. The Bloomberg aggregation of same-store sales data accelerated to up 5.1% year-over-year in January from 4.4% in December. Moreover, retail sales were strong in January 2012, with the “control” measure in the retail sales report up 1.0% month-over- month. That makes the acceleration on a year-over-year basis even more impressive."
Here's his chart:
O'Sullivan warns, however, that when the payroll tax cut went into effect two years ago, the impact on spending was not immediately obvious and appeared in the data on a lag.
However, there are a number of positive trends that should help offset the impact of the tax.
"[P]art of the pattern likely also reflects the spending power being generated by an increasingly healthy labor market recovery," writes O'Sullivan.
In addition, the people who're seeing a higher dollar value being cut from their salaries are the ones that have high salaries to begin with, according to O'Sullivan, and such upper-income people tend to be cushioned from the impact of a higher tax bill.
From the report:
"We do not believe the acceleration of bonus income and dividends from 2013 into late 2012 to escape higher taxes has had any significant impact on the spending data. Most recipients of that income were likely upper-income individuals with high saving rates, who do not live paycheck to paycheck."
Still, this doesn't mean we're in the clear.
"With the tax reducing disposable income by 0.9%—equivalent to 0.7% of GDP—and many individuals living paycheck to paycheck, there clearly will be an impact on growth," he writes.