For as picked over and criticized as the Fiscal Cliff deal has been over the last few days, a tax break getting less attention than may have been expected is the one thing that impacts anyone taking home a paycheck. With the expiration of a temporary Social Security payroll tax everyone's take home pay just fell 2%. The question is whether or not the reduction is going to be more of a problem than most investors think.
"This hurts seriously," says Brian Sozzi, chief equities analyst NBG Productions, warning that next week Americans will feel "payroll shock."
It's common sense. If you're taking home less money, you can either take down your savings level or cut discretionary spending. Given the choice, most people will ultimately reduce their spending on items they want but don't need.
The difference between the payroll tax bump and other hikes in the bill is the immediacy of the hit. Your tax rate isn't something you're forced to consider every two weeks, but your paycheck is. Workers never see the money being put into Social Security. Not even American consumers can throw away money they never had in the first place.
Related: 3 Landmines in the Fiscal Cliff Fix
Sozzi's strategy for getting around this potential headwind is to stick to investing in companies focused on basic goods with international exposure. The dollar discount stores that did so well last year will take a bigger hit than companies with income from around the world.
What do you think? Is the expiration of the payroll tax cut going to reduce consumer spending more than the market thinks? Give your thoughts in the comment section below or Tweet me @Jeffmacke
- Politics & Government
- Budget, Tax & Economy
- Social Security payroll tax