Higher Tax Rates Destroy Personal Income and Savings (but Not Spending — Yet) in January

By Jon C. Ogg Published Mar 1, 8:55AM EST

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Personal income tanked in the month of January while spending maintained a narrow 0.2% gain. Today’s report from the Commerce Department showed that income was down b a whopping 3.6% as higher tax rates kicked in. Dow Jones was calling for a drop of 2.5% in income and Bloomberg was calling for a drop of only 2.1%. This was the largest one-month drop that most workers have seen in their careers.

What lies ahead is the key question. Consumers may continue to dribble off on their spending, and the income drop should start to normalize in the months ahead. The dilemma is that if spending remains higher when take-home pay is lower, then that means you can kiss any broad savings goodbye. As proof, the personal savings rate fell to 2.4% in January from 6.4% in December.

If you consider the PCE inflation component, spending would have been up only 0.1% in January. We already have seen large retail outfits confirm and warn that lower take-home pay is starting to be felt, and the delay in tax refunds is being felt as well.

Keep in mind that January was just the first month of the payroll tax. It is going to take several months for this normalize before we know the real level of income, spending and savings. All politics aside, increasing taxes too much will have a negative impact somewhere.

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About the Author Jon C. Ogg →

Jon Ogg has been a financial news analyst since 1997. Mr. Ogg set up one of the first audio squawk box services for traders called TTN, which he sold in 2003. He has previously worked as a licensed broker to some of the top U.S. and E.U. financial institutions, managed capital, and has raised private capital at the seed and venture stage. He has lived in Copenhagen, Denmark, as well as New York and Chicago, and he now lives in Houston, Texas. Jon received a Bachelor of Business Administration in finance at University of Houston in 1992. www.247wallst.com.