Does Your Paycheck Seem Smaller Lately?

Millions of Americans are in for a shock when they open their pay envelopes this month. Despite the well-publicized tax relief voted by Congress, take-home pay will be reduced in many instances. The total federal tax bite will indeed be less than last year, but the rates of tax withholding have been changed, with the result that people in the upper-middle and higher brackets will be hard-hit. For example, the amount withheld from the wages of a married worker with two children who earns $250 a week will remain virtually unchanged at $30.50. But for an employee earning $400 a week, the withholding will rise from $60.90 to $67.10, and a $500-a-week earner will pay $96.60 v. $84.80. By cutting into the cash that consumers have to spend, the withholding changes could impede the economy's recovery.

Rates have been rejiggered because they were too low last year. Congress simply overestimated the amount of revenues that the 1971 rates would bring in after the old income tax surcharge was removed. Thus, many people will have to pay a walloping amount of back taxes to the Government on April 15--to make up for what they innocently failed to pay in installments last year.

Just as the Government withheld too little last year, it may be withholding too much this year. If a married couple file a joint return, but one of the two is unemployed, they very likely will be paying out too much in withholding. Similarly, an earner who expects to have big itemized deductions for home-mortgage payments, medical bills, charity and the like will probably overpay. To ease the weekly or monthly burden for these people, the Internal Revenue Service has created a new exemption called the "special withholding allowance." People who believe that their employer is holding back too much can go to him and claim from one to seven such exemptions to bring their payroll deductions more closely into line with their actual tax obligations.

In addition to increased withholding, the Social Security levy was boosted this year by raising the amount of taxable income from $7,800 to $9,000. Until now, most middle-income paychecks fattened slightly just before summer-vacation time as Social Security taxes stopped. This year such levies could continue through mid-August, dampening some holiday plans. On top of this, state and local taxes are also climbing by $8 billion, to an estimated $63 billion this year. Both New York State and City income taxes are going up. Minnesota has raised both income and sales taxes. Ohio has just imposed its first state income tax, and California has dropped its old system of collecting income taxes at year's end and started a withholding system.

Though state and local taxes will quickly be poured back into the economy in labor and material costs, they nonetheless pluck dollars away from middle-income consumers--at a time when consumer confidence seems at last to be flowering. Whether it will continue to bloom in the shadow of these fiscal increases is a matter of deep concern among economy watchers in and out of the Administration.

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