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Fiscal cliff deal raises payroll tax

House Minority Leader Nancy Pelosi (D-CA) arrives for a House Democratic Caucus meeting to discuss the fiscal cliff before a rare New Year's Day session on January 1, 2013 in Washington, D.C.

A deal has finally been reached on Capitol Hill over the fiscal cliff. The House approved an agreement late last night. It's now headed to the White House for President Obama's signature.

As you've probably heard, income taxes will go up on individuals making over $400,000. However, one element of the debate that slipped from the spotlight in recent weeks was the fate of the payroll tax cut. The cut was introduced two years ago in an effort to jumpstart consumer spending. But yesterday's fiscal cliff deal puts an end to it. 

"[It's] going to hurt a lot of middle income American workers, and I think it will have a real effect on the U.S. economy in the first half of this year," says David Kelly, chief global strategist for JP Morgan Funds.

The resulting 2 percent tax rise means that a person who earns $50,000 a year will pay $1,000 more in taxes. While the increase may seem relatively small at the individual level, economists expect the elimination of the tax cut to cost the economy $100 billion or 0.5 percent of GDP.

Kelly predicts the tax hike will hurt grocery sales, restaurant spending, gasoline sales, and a range of other basic consumer spending areas.

"The bad news is that it is a pretty big tax increase," says Kelly, but he adds, "the good news is that it will have significant impact on improving our fiscal situation."

 

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