The Washington PostDemocracy Dies in Darkness

Why didn’t the payroll-tax hike hurt more? Maybe because few people noticed it.

Remember the payroll tax hike? Back in January, Congress allowed Social Security taxes to rise back to their normal level — instead of a 4.2 percent tax on their paychecks, workers were getting hit with the full 6.2 percent again. That essentially wiped out a year's worth of wage gains for many Americans.

And yet... none of the horrible macroeconomic consequences that were predicted have yet materialized. Consumer confidence is still high. Retail sales surged by 1.1 percent in February. The economy continues to grow. Americans didn't cut back on their spending as expected.

So why is that? One possibility is that many workers aren't even aware that their taxes have risen yet. A new survey from finds that just 30 percent of Americans have cut back on spending as a result of the payroll tax hike. A full 48 percent of Americans haven't noticed the change at all:

In particular, low-income Americans were least aware of the change, with 59 percent not noticing any difference. Over at Real Time Economics, Kathleen Madigan says that this shouldn't be too surprising:

The findings aren’t a case of mass denial, says Greg McBride, senior financial analyst at Instead, the low recognition rate may reflect the fact that some low-income workers (earning less than $30,000 a year) are paid in cash. Plus, many are on hourly schedules, and shifting work hours result in different weekly paychecks.

So what does this mean going forward? There are a few possibilities.

1) Once most Americans realize that their disposable income has shrunk — by $1,000 this year, on average — they could cut back on spending significantly. That, in turn, could slow down the economy. So maybe we just need to wait a few months before the broader economic effects materialize.

2) Most Americans will continue to maintain their current levels of spending anyway, even though they have less take-home pay. They'll simply borrow more to make up the difference. That was one possibility explored by a recent study (pdf) from the Federal Reserve Bank of New York.

3) People will eventually notice the payroll tax hike, but its effects will be offset by strong job growth, Fed chairman Ben Bernanke's efforts to bolster the economy, and growing wealth. (Paul Dales of Capital Economics recently predicted that surging home and stock prices should be enough to boost consumer spending an additional 0.7 percent this year.) In other words, the U.S. economy has reached escape velocity and the payroll tax hike can't pull it back down.