Despite deal, most will be hit with tax hike

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(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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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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