Despite deal, most will be hit with tax hike

(Moneywatch) The wealthy aren't the only ones with higher taxes as a result of the "fiscal cliff" deal: Federal taxes will go up for 77 percent of Americans because of the expiration of the two-percentage-point payroll tax cut. This could have a bigger impact than anything else in the new law. But there's a lot of debate over whether the impact will be bad or good for the economy.

For the last two years, employees' share of the Social Security payroll tax was lowered by two percentage points, to 4.2 percent from 6.2 percent. This gave a family earning $50,000 a year an extra $1,000. The end of that means most U.S. households will face the highest tax burdens since 2008. In total the rise in payroll taxes could cost workers about $125 billion a year, around 0.8 percent of the nation's overall output, according to JPMorgan Chase.

Despite workers having less to spend, some analysts believe just having a deal will be a boost for the economy.

"We expect some fiscal lift because nearly all Americans will be relieved to learn this morning that Congress has permanently lowered their taxes," says Ed Yardeni, president and chief investment strategist for institutional investor advisory Yardeni Research. "That should boost consumer confidence and spending. If the stock market continues to rally, as I expect, even rich folks facing higher taxes will be happy to see their equity portfolios appreciate."
"The initial reaction of our US economics team to the 'deal' is that ceteris paribus [if all other things stay the same], it boosts 2013 GDP growth by around one-half percent," says Kit Juckes of Society Generale. "US 2013 GDP growth is now likely to be in a 2 percent to 2.5 percent range, and the chances of ... growth [in the second half of the year] exceeding 3 percent are significant."

However, many others anticipate the exact opposite response.

Economists at JPMorgan Chase say the new taxes may slow the economy and reduce growth in the first quarter to 1 percent, from the 3.1 percent in 2012's third quarter. Jan Hatzius of Goldman also expects it to cut 0.6 percent from 2013 GDP.

"We continue to anticipate a significant economic slowdown at the start of the year in response to fiscal drag and a contentious fiscal debate," says Nomura economist Lewis Alexander.
"By my back-of-the-envelope count, the deal the Obama administration has agreed to still leaves a net fiscal impetus of -1.75 percent of GDP to hit the U.S. economy in 2013," says University of California-Berkley professor Brad Delong.
"The total drag on the economy (using the CBO's fiscal multipliers and Goldman Sachs estimates) is -1.3 percent," says Cullen Roche, founder of Orcam Financial Group.

It had been hoped the fiscal cliff deal would have eliminated a lot of economic uncertainty but clearly a lot still remains.

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ajaynejr says:: Social Security has been running surpluses for many years with the excess lent to the Federal government. So there is nothing wrong with making up for a decrease in Social Security tax with money from the general fund.; reply

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hypnotoad72 says:: Since the economy depends most on the working class, whose remaining jobs stagnated or dropping wages will now be compounded, anyone who asks if the economy will do better is probably going to be wrong.

But the economy was doing great every time we gave tax cuts and taxpayer-funded handouts to corporations that offshored jobs and they'll still get their lawyers to give them a comparatively free ride, so whatever...; reply

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joesapper says:: So all escape the fiscal cliff , as foodstamp cost reached $100 Million .

Considering the saly ann , soup kitchens , food banks , and a host of bailouts , including trillions on the credit card of the Gov , one has to wonder when the fog of politics is going to lift under the trade winds of reality ?

How is the White House paying the bills , it is not the tax hikes . No spending cuts is the song the White House dances too. Well the EU sang the same song not that long ago . Socialist failed every time in history , and yet , it is the doctrine of this White House . Anyone notice the millionair that left France and moved to Russia ?
The fiscal cliff is nothing compared to the failure of kicking the can once again down to the pit of complete failure . Good Luck.

Remember the Pres said said your taxes would not go up if you were not part of the top 2% , well how is that working out for ya ?; reply

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obicera1 says:: Social security tax should be on all taxable income, not just the first $110k.; reply

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rick94--2008 says:: LAM1987's comment about my payroll tax actually being "saving for retirement" is pure hogwash. I've been paying in my entire business life and never expect to see most of it again. Even without the interest I could have accrued had I invested it myself.; reply

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jhowardholmes@comcast.net says:

While I am not looking forward to paying any more taxes, especially considering those fools in Washington will not only spend the additional amounts but more, riddle me this.
What sense did a 2% decrease on Social Security make when Social Security is already underfunded?

Just another pathetic attempt to rob Peter to pay Paul.
It is a good thing the United State can print more money as it needs it.
Unfortunately, most Americans don't realize every day their money is worth less.

The Milk Subsidy - nice job causing fear and panic among the American public for a subsidy that is out of date. Just like the fiscal cliff - a mirage.

And LAMI987 - they have already spent money on something else. The second they get it - it is gone.


Dave-in-Racine replies:: linkicon reporticon emailicon; The decrease on the Social Security tax was made up for with money from the general fund so on paper the SS fund continued to look like it was receiving the full 6.2% employee contribution.

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lami987 says:

I don't consider payroll tax increase is actually a tax increase because payroll tax is actually saving for retirement. It is different from income tax because once your income tax is paid you say good bye to your money and never see it again.


Dave-in-Racine replies:: linkicon reporticon emailicon; The Social Security part of the payroll tax goes into a fund that pays for current retirees with any excess lent to the Federal government. So it's not really saving for retirement. My Social Security will be paid by the then current workers and the Federal government paying off the loans from SS through tax receipts or additional borrowing.