Despite Payroll Tax Hike, U.S. Consumers Spend More

Brent Phipps’s employer must reduce spending by $85 billion this fiscal year, thanks to sequestration. As a result of earlier negotiations to avoid the fiscal cliff, government workers like Phipps have seen their payroll taxes go up two percentage points. So why is Phipps, a paralegal for the U.S. Department of Justice, going shopping? Browsing through the aisles of a Target in Washington, Phipps says the payroll tax hike hasn’t altered his spending habits. “I didn’t really pay any attention to it,” he says. “I can’t say I had any particular ‘Oh no, I’m not going to do X, Y, and Z.’ ”

Consumers and businesses are treating higher payroll taxes and federal spending cuts as a mere speed bump for the economy. Americans are saving less and spending more for purchases such as new cars as household net worth climbs, with home values rising and stock indexes hitting record highs. “A lot of things are going the right way,” says Brian Jones, a senior U.S. economist at Société Générale in New York. “To a certain extent, this neutralizes the effects” of higher taxes.