A few days before the election the media is replete with pundits who cite the “anger” of the electorate as the reason why incumbents are in jeopardy, why the Tea Party is in ascendancy and why so many House and Senate seats are in play and are likely to go Republican. This anger derives from excess spending and higher taxes. While there is no question that anger is out there, it is only one of many factors that animate the electorate. Moreover, most people haven’t yet felt the actual impact of higher taxes and hence this factor is presently theoretical. That is about to change, and the politicos and the President haven’t a clue as to what is screaming down the tracks, for what has been theoretical is about to become very, very real. A number of factors are coalescing into a perfect storm.
The amount of withholding for Federal income taxes is controlled by tables provided by the IRS. We all know that the Bush tax cuts are scheduled to expire on December 31, 2010 and most commentators believe that no matter who wins the election, they won’t be reinstated in the near future. If the Democrats maintain their majorities, they will insist that any reinstated cuts apply only to lower incomes and the Republicans will not go along. If the Republicans take either the House or the Senate, it is likely that they will attempt to reinstate all the cuts only to face Obama’s veto. This stalemate means that taxes and the withheld amounts are going up.
Contrary to the “tax cuts for the rich” meme, the Bush tax cuts affected all tax brackets. The tax rate for the lowest bracket for singles ($0 to $8,500) will increase by 50%. Only the $8,500 to $34,550 will not change and that means that the great middle class is going to get slammed.
While the withholding tables for 2011 have not yet been published, but as is described in the Economic Policy Journal.com, with the current uncertainty as to 2011 tax rates, “. . . the IRS is likely to send out 2011 withholding schedules assuming no Bush tax extension.” These schedules are mandatory.
The next component of this perfect storm is the fact that the paychecks for a vast number of employees are directly deposited into their checking accounts. While it is difficult to determine the percentage of employees who are paid in this fashion, there are estimates that range from 50% to as high as 70%.
As a consequence, many people really don’t monitor the net amounts they receive on a real time basis.
Moebs Research Services, an economic research firm reports that 87% of bank account holders do not reconcile their bank statements.
Yet virtually all of these people write checks and use debit cards which draw on the same accounts, and a very substantial number of these people live on a “budget” that consumes most of their paychecks (the so called “paycheck-to-paycheck” life). Since such budgets are informal, the common scenario is that the account holder gets used to how much they can spend not because they reconcile their accounts, but rather by frequently checking their balances and stumbling against an occasional over -draft with the consequent fees. After a few monthly cycles, they have an intuitive sense of how much they can spend and they tailor their spending accordingly. The account holder hit by an overdraft charge will not be happy, but is consoled that at least the check didn’t bounce or the debit card wasn’t declined.
But overdraft fees were one of the perceived evils that were addressed in the Financial Reform legislation. No longer could a financial institution automatically provide overdraft protection to account holders and charge fees when the protection was utilized. Instead, there had to be a written request from the account holder together with a raft of disclosures by the institution. We are going to find out real soon how many folks affirmatively opted for overdraft protection. Millions did not and many who did, never anticipated that they would use the service.
And now the perfect storm arrives.
In January of 2011, millions of Americans who through 2010 relied upon there being a certain amount of money deposited into their accounts monthly by their employers and who have managed their spending accordingly, will discover part way through January that because of the substantial increase in withholding, their paycheck deposits will be much less. For those without overdraft protection, checks will bounce, debit cards will be declined, and household budgets will be busted. For those who did opt for overdraft protection, unexpected overdraft fees will be incurred. About 2/3rds of the way through the month, many people will discover that they are out of funds for the month. Household bills will not have decreased nor will the bills resulting from holiday expenditures. For the first time, the impact of Obama’s tax policies will hit millions of homes in a very real fashion.
Were we talking about angry Americans?