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US Personal Income Falls 3.6% in January, Biggest Drop in 20 Years

Steve Cole/Getty Images(WASHINGTON) -- Americans spent more money in the beginning of this year, even as their wallets shrunk, new government figures out Friday show.

According to the latest report from the Commerce Department, consumer spending increased 0.2 percent in January.  This jump came even as personal income fell 3.6 percent that month, reflecting the expiration of the “payroll tax holiday." The plunge is the biggest in two decades and follows a spike in December.

“The large decrease in personal income in 20 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.

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.

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