Posted: 3:41 a.m. Friday, April 5, 2013
By Brian O'Connell
NEW YORK (MainStreet) — Maybe you’ve heard the term “the law of unintended consequences?”
It’s what happens unexpectedly after plans and processes are into place — and it’s usually not good news.
Take the 2 percent payroll tax cut enacted by Congress in 2011 and 2012 to spur consumer spending and kick-start a slumbering U.S. economy.
Well, 2011 and 2012 have come and gone, and the payroll tax is up again, and with it a noticeable decline in take-home pay for tens of millions of American workers.
Officially, on Jan. 1 employee payroll taxes rose to 6.2 percent from 4.2%, leaving less money in consumers’ pockets.
Removing a tax cut that was mean to jumpstart economic growth may have the opposite effect when it’s snatched away — the “law of unintended consequences” part of the equation.
Here’s one way U.S. consumers are responding to having less cash in their pockets: A survey by the American Institute of CPAs and Harris Interactive says most tax refunds are going toward day-to-day expenses.
The survey last month of 1,011 U.S. adults reveals that 43 percent of respondents who get a tax refund say the refund is “more important” this year than in years past. While 46 percent say they will stash their refund into savings, 37 percent say they will use it for those day-to-day expenses.
The AICPA adds that 71 percent of study respondents say the payroll tax hike has had an impact on their finances, with 96 percent say they had to make some kind of adjustment in their personal finances after finding less cash in their paychecks this year.
Common cutbacks in Americans’ household budgets after the tax hike include:
With less money on the table, Americans believe they’ll need to be more frugal this year than last, and that certainly won’t help the consumer spending portion of the U.S. economy.
“Last year the U.S. government sent checks totaling nearly $310 billion to taxpayers, underscoring the significance of tax time to American households,” says Ernie Almonte, chair of the AICPA’s National CPA Financial Literacy Commission. “This year, in the wake of a paycheck squeeze, many Americans are counting on those refunds for relief — a way to bolster savings or shore up budgets. It’s critical that they have a well-thought-out plan for using the funds to maximize the benefit to their financial well-being.”
The AICPA advises cash-strapped Americans to prioritize when it comes to spending a tax refund. Household basics such as food and gas come first. After that, setting up an emergency fund and paying off debt can be addressed, if the cash is available.
If you’re cash flush and can think long term with your tax refund, use it to make an extra mortgage payment or to stash more money into your retirement fund.
More and more Americans don’t have that luxury these days. Instead of popping some money toward that retirement in Fort Myers, chances are the money is going into your food budget or fuel tank.