The WSJ this morning published a terrific piece on the hit to retail spending due to the 2% hike in payroll taxes (see Payroll Tax Whacks Spending).
To be sure, higher taxes are problematic. However, the piece overstates the damage from this one measure to the overall economy.
Prior to posting the CFS monetary aggregates and components earlier this week, we combed the data for key themes such as the impact of the payroll tax hike on the economy. It is clear that the 2% boost in payroll taxes marginally reduced liquidity in the banking system. However, the small decline in bank deposits could also reflect the drawing down of funds to invest in strengthening stock markets.
So on balance, the payroll tax hike is an unfortunate drag on growth. However, the financial system is heeling. Banks and corporations are flush with liquidity. So even if retail spending is reduced on the margin (the WSJ notes that a family with an annual income of $65,000 will lose just over $100 per month in spending power), corporations are and will continue to invest. This too is clear from the CFS monetary and financial data.