The Obama administration hopes that a one-year, 2 percent cut in payroll taxes will stimulate spending by consumers and give the economy a boost. But if the reaction from personal finance sites is any indication, consumers are likely to save more of the money than the administration hopes.
Take SmartMoney. This morning it came out with a rather straight-forward article entitled “What To Do With A Payroll Tax Cut.” It begins by pointing out that the Obama administration has a theory that this kind of tax cut—which delivers a small boost in workers’ paychecks—will encourage more spending and provide more economic stimulus than the Bush era rebate checks did. (This theory is, to say the least, unproven. We pointed out some serious flaws in it yesterday.)
But when it comes down to giving the actual advice about how to use the tax cut, Smart Money goes in the other direction. The very first thing it advises is that people put their money in an 401(k) or an IRA to “juice retirement savings.”
Want an immediate 35 percent return? Contribute that extra 2 percent to a 401(k) or a traditional IRA, and someone in the 35 percent tax bracket would save $560 in taxes, says Jimmy Lee, chief executive at Strategic Wealth Associates, a wealth management firm in Phoenix. Contributing the money to a Roth IRA would also be a small tax lottery because experts largely expect taxes to rise after 2012—making today’s after-tax dollars (and therefore, that Roth contribution) “cheaper” than they will be in the future. More convincing: Roth IRA contributions also result in more money come retirement, says Stuart Ritter, a certified financial planner at T. Rowe Price. A 55-year-old who contributes an extra $2,100 in 2011, assuming a conservative 5 percent return over 10 years will end up with $3,421—8.5 percent more than if he’d contributed to a traditional IRA and paid taxes later.
The next thing it advises—more savings. This time for the rising costs of health care.
The only time Smart Money gets around to recommending some spending is at the end of the article, when they advise readers to make “big ticket home appliance purchases.” But those are expensive and the way the tax-cut is structured, it will take most workers a long time to save up enough to make the purchases. So this is, at best, delayed spending. You know what another word for delayed spending is? That’s right, savings.
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