The Commerce Department reported that personal income dropped 3.6 percent in January, reflecting the expiration of the “payroll tax holiday” but consumers still managed to increase spending slightly.
The drop in personal income was the biggest in 20 years. Personal consumption expenditures increased $18.2 billion, or 0.2 percent, in January. The figures were in line with what economists had expected.
Congress and President Obama had decided not to extend the payroll tax cut from 2010, allowing it to increase to 6.2 percent from 4.2 percent. That effectively increased the Social Security contribution rate for employees and self-employed workers by $114.1 billion at an annual rate.
The increase in consumer spending contradicts reports from some retailers like Walmart, which indicated the expiration of the payroll tax holiday negatively affected sales.
Read more: Payroll Tax Increase and Consumer Spending
“The large decrease in personal income in twenty years looks to be stock dividend-related whereby most companies prepaid them to avoid Obama’s tax hikes. Dividends are now taxed at 20 percent versus 15 percent last year,” said Tom di Galoma, managing director at financial services firm Navigate Advisors LLC.
Read more: 9 Most Contentious Fiscal Cliff Tax Issues