The government's latest failed tax gambit got off to a promising start. With bipartisan support, Congress temporarily lowered the taxpayer portion of the Social Security ("FICA") tax from 6.2% to 4.2%. Legislators hoped that the break would give Americans more money to spend, thus boosting the economy. They were wrong.
Faced with higher prices for fuel and food, Americans are simply spending more on staples instead -- and may be upping their savings as well. While that latter move may be bad for the economy, it's generally good for individuals like us to increase the amount we save.
The Social Security tax break isn't just small change. If your income is $75,000, you're now keeping an extra $1,500. If you make $50,000, you've got an additional $1,000 to enjoy. Clearly, that's enough to buy a new large-screen TV, a dishwasher, or a modest vacation. But many people seem to be just socking that money away instead. The household savings rate rose from 5.4% in December to 5.8% in January.
Economists won't rejoice; our economy definitely needs more encouragement. But given that many Americans just aren't saving enough to prevent a scary retirement, this is very promising for the folks actually doing the saving.
Inflation gets pumped up
While the tax break is a boon to us all, rising prices have weakened some of its punch. Inflation's affecting all kinds of staples, putting pressure on American budgets.
Rising commodity prices have led Procter & Gamble
The price of crude oil is up some 24% over last year, and according to some experts, gasoline may soon top $4 per gallon soon. That affects not only us drivers, but also all kinds of transportation. Airlines have been upping their fares and fees. US Airways
We should certainly celebrate the help the payroll tax break grants us in spending, saving and investing. But don't expect it to fix our economy -- and prepare to feel an even harsher pinch once it expires.
For lots of ways to lower your tax bill, check out the Fool's Tax Center.
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Longtime Fool contributor Selena Maranjian owns shares of Procter & Gamble, a Motley Fool Income Investor pick. The Fool owns shares of Dean Foods. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.