More Than Half Say Tax Hikes Have No Effect on Spending

US News

Politicians assume that raising taxes is one of the surest ways to get voted out of office. But this hoary bit of conventional wisdom is turning out to be wrong, because tax hikes this year have been far less disruptive than anybody imagined.

In a new survey by Bankrate.com, 48 percent of Americans say they haven't even noticed the increase in payroll taxes that went into effect at the start of the year. Another 7 percent said they've noticed the tax hikes but haven't been affected. That leaves about 30 percent of Americans who have cut back spending as tax hikes have reduced their take-home pay--a far lower percentage than many economists predicted.

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Those findings amplify other evidence that the tax hikes, which went into effect as part of the "fiscal cliff" deal in January, have had surprisingly little impact on the overall economy. Retail sales this year have been strong, for instance, even though the two-percentage-point hike in the payroll tax shrunk paychecks by an average of about $80 per month. Other tax increases, on wealthy earners, took more money out of the economy, with seemingly little effect.

All told, tax hikes will reduce GDP by about $150 billion this year. That's a small slice of a $16 trillion economy, yet economists expected that the highly visible political battles leading up to the tax hikes would depress confidence, restrain spending and perhaps threaten another recession. That hasn't happened. "There is no readily apparent effect on overall consumer spending from the tax increases that occurred in January," forecasting firm Macroeconomic Advisers recently declared. As a result, the firm has raised its estimate of first-quarter GDP growth from 2.3 percent to 3.2 percent, a sizeable jump.

There are several reasons Americans have become somewhat desensitized to tax hikes. The housing rebound is a big one. With homes now appreciating in value once again, household wealth is rising and home owners simply feel better off. Low interest rates, engineered by the Federal Reserve, have sharply decreased the debt burden borne by typical families. The rising stock market helps too, since it conveys the impression--accurate or not--that good times are on the way back.

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There may also be a swelling underground economy--people working for cash, even at a professional level--that's putting more untaxed income into people's pockets.

As Washington's budget problems have worsened, support for tax hikes has ticked upward, according to polls. Yet most people, not surprisingly, favor tax increases on somebody else while opposing higher taxes for themselves. So it would be a mistake to assume that voters are willing to absorb further tax hikes as the sole way to fix Washington's finances.

Strong majorities, however, support tax hikes when combined with cuts in government spending, such as those that just went into effect under the sequester. So if those cuts stick, it might strengthen President Barack Obama's case for additional tax hikes, mostly on the wealthy, to help pay down the national debt.

It's worth pointing out that both Republicans and Democrats have misconstrued voter attitudes toward different ways of solving Washington's budget problems. Republicans characterized the January tax hikes as the end of free-market democracy, yet consumers mostly yawned. Obama predicted widespread doom if the sequester went into effect, while Americans kept spending and the stock market reached new highs.

[READ: 10 Things You Didn't Know About the Bush Tax Cuts]

It would be no surprise if ordinary Americans turned out to be wiser than their elected representatives in Washington. It would be quite refreshing, however, if the politicians listened to them for once.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.



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