“A higher tax rate reduces our ability to recapitalize and reduces our ability to expand,” he said. “You keep your forklifts a little longer, you do whatever you can to stretch the dollars you’re left with.”
Much of the economic damage caused by the tax increases of 2013 had nothing to do with the expiration of the Bush tax cuts. Instead, the lapse of a 2 percentage-point payroll tax reduction took money out of consumers’ pockets at all income levels, said Ward McCarthy, chief financial economist at Jeffries LLC.
“It put a bite on consumer cash flows,” he said. “The payroll tax, frankly, was more painful in some sense than the higher marginal tax rates.”
That change ended four years of expanded paychecks because of the payroll tax cut and its predecessor, the Making Work Pay tax credit Obama campaigned on in 2008.
Take-Home Pay
According to Zandi’s estimates, the payroll tax cut subtracted 0.6 percentage points from U.S. economic growth, more than twice the effect of the high-income tax cuts.
The expiration of the payroll tax cut meant that a worker earning $60,000 a year had $100 less per month in take-home pay.
The question of how much tax-law changes affect the economy also plays out in states, where lawmakers have cut taxes in an effort to provide a jolt to businesses or raised them to bridge budget gaps that persisted after the recession.
California in November 2012 approved a temporary increase in the tax on retail sales and set a nation-high tax bracket of 13.3 percent on incomes of more than $1 million. Opponents warned that it would extract a toll in lost jobs, as businesses cut costs or fled to other states.
California’s Example