Moody’s Zandi: Payroll Tax Hike on Back Burner, Set to Rise

Thursday, 20 Dec 2012 10:07 AM

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Negotiations between Democrats and Republicans to keep income taxes as low as possible may overlook the oft-ignored payroll tax, which is due to rise for millions next year, said Mark Zandi, chief economist at Moody’s Analytics.

The White House and Congress are scrambling to steer the country away from the fiscal cliff, a one-two punch of expiring tax breaks and deep spending cuts due to take effect at the end of this year.

The potentially recessionary fiscal cliff involves a series of expiring tax breaks, most notably the Bush-era income tax cuts.

Editor's Note:
Make 2013 the Year You Pay Zero Taxes

Other tax breaks include a 2 percent payroll tax holiday and extended unemployment benefits.

Should the payroll tax break expire, millions of Americans could see that tax rate jump to 6.2 percent from 4.2 percent, and the economy could cool.

“It’s been a very effective tax cut for the economy,” Zandi told CNBC.

“It’s kind of the Rodney Dangerfield of taxes in that most people are not aware of it but it could bring on a significant hit to growth if it ends.”

Consumer spending drives 70 percent of the U.S. economy, and even a slight hike in the payroll tax can take money out of the pockets of would-be consumers, other experts say.

“Where it will show up most is in retail, dining out and vacations,” said Timothy Nash, an economics professor at Northwood University in Midland, Mich., CNBC added.

“It also means lost revenue on savings and investments.”

The impact, other experts point out, will be immediate.

“First paychecks [of the new year] will be about 2 percent smaller,” said Roberton Williams, a senior fellow at the Tax Policy Center in Washington, according to The Christian Science Monitor, adding that for the economy as a whole the payroll tax cut amounted to about $112 billion in 2012.

“It’s money taken out of the economy that is not available to be spent,” said Williams.

Editor's Note:
Make 2013 the Year You Pay Zero Taxes

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