Tax Cuts from Trump Increase Earnings and Savings

Disposable Income Rises in January Amid Tax Cuts

In January, American disposable income saw a significant increase as tax cuts initiated by former President Trump’s legislation began to impact paychecks. This trend also led to a boost in personal savings rates while consumer spending seemed to take a backseat, as reported by the U.S. Bureau of Economic Analysis.

Personal disposable income climbed 0.9% in January, which is notably higher than the 0.3% rise observed in December. This growth is largely attributed to a 3.2% reduction in individual taxes, marking one of the largest monthly declines seen in some time. This change came into effect with updated withholding schedules due to the Big Beautiful Bill Act at the start of the year.

The tax cut, signed on July 4, 2025, introduced new deductions applicable to tipped workers, overtime pay, auto loan interest, and seniors, which started reflecting on paychecks in January when employers began using the new IRS withholding mandates for 2026.

As a result, personal savings rose to $1.05 trillion, and the savings rate increased from 4.0% to 4.5%, indicating that consumers opted to save a considerable portion of their after-tax income rather than spend it right away.

In contrast, real personal consumption spending only grew by 0.1% in January, mirroring the modest growth of December. Spending on goods decreased by 0.4%, primarily due to a $29.3 billion drop in motor vehicle purchases. However, spending on services did see a slight increase of 0.3%.

The inflation landscape wasn’t particularly encouraging. The PCE price index rose by 0.3% from December and was up 2.8% compared to the same month last year. The core PCE price index, which omits food and energy, went up by 0.4% month-over-month and 3.1% year-over-year—marking an increase from the previous month’s 3.0%, still well above the Federal Reserve’s 2% target.

Overall, personal income grew by 0.4% in January. Wage and salary compensation saw an increase of $83.7 billion, largely driven by a $71.2 billion rise in wages. Additionally, cost-of-living adjustments raised Social Security benefits by $49.2 billion, although this was partially counteracted by a $16.7 billion reduction in other Social Security benefits due to lower projections for Affordable Care Act enrollment.