‘Fiscal cliff’ deal already shrinking your paycheck

Bloomberg NewsJanuary 5, 2013 

— The biggest hit to the economy and to taxpayers from the “fiscal cliff” package probably will come from the expiration of the payroll tax cut. Designed as a temporary measure to boost the economy in 2011, the reduction was extended through 2012. Its elimination will slow growth by just over a half percentage point this year by taking $125 billion out of consumers’ pockets.

Payroll taxes will rise, to 6.2 percent from 4.2 percent last year, ending transfers from the general fund to Social Security to cover its cost. That will make paychecks smaller in 2013; someone earning $50,000 and being paid twice a month will lose $41.67 per paycheck.

It “will have a meaningful impact because it hits everybody,” said Michael Gapen, a New York-based senior economist at Barclays Plc. “You’d see it in the first quarter, and consumption would ratchet down.” Higher taxes on the wealthy won’t have as much of an effect because top earners tend to save more of their income rather than spend it, he added.

The first-half slowdown will mean that the U.S. will make limited progress in reducing unemployment in 2013, according to projections by Ethan Harris, co-head of global economic research for Bank of America in New York. He sees the jobless rate falling to 7.5 percent in the fourth quarter of 2013 from 7.7 percent in November 2012.

Regardless of how Congress dealt with the fiscal accord, “we’re probably going to see a slower economy in early 2013,” said Guy Berger, an economist at RBS Securities in Stamford, Conn. “Growth is going to be soft though not negative in the early part of the year, with the economy gradually picking up in the second half of the year.”

Households making less than $450,000 per year have been spared an income tax rate increase. The wealthy will see a rise in their top rate, to 39.6 percent, from 35 percent.

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