Tags: payroll | tax | holiday | economy

End of Payroll Tax Holiday Could Dent Economy

Monday, 24 Dec 2012 07:42 AM

By Dan Weil

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The payroll tax reduction that is scheduled to expire Dec. 31 isn’t the focus of much attention in the talks to avoid the fiscal cliff.

But failure to extend the payroll tax cut, which began in 2010 to help beleaguered consumers, could have a major impact on the economy.

The reduction pushed payroll taxes down to 4.2 percent from 6.2 percent for more than 160 million Americans.

Editor's Note: The IRS’ Worst Nightmare — How to Pay Zero Taxes

JPMorgan economists estimate that if the rate goes back up, the economy will grow 0.6 percentage point less next year than it otherwise would have. Payroll taxes would be the biggest drag on the economy of all fiscal cliff elements, they say.

"It's been a very effective tax cut for the economy," Mark Zandi, chief economist at Moody's, tells 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."

The non-wealthy would be at a particular disadvantage if the payroll tax holiday ends.

"The people who are going to feel it the most are people making minimum wage to about $15 an hour, because they're the ones who are just getting by," John Lieberman, an accountant at Perelson Weiner, tells CNNMoney.com.

"Two percent of someone's income is a lot of money when you're only making $400 a week."

Editor's Note: The IRS’ Worst Nightmare — How to Pay Zero Taxes

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