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Fiscal Cliff

‘Cliff’ deal ends payroll tax cut

Nancy Marshall-Genzer Jan 2, 2013
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Two years ago, Congress and President Obama agreed to cut the social security payroll tax by 2 percentage points, in an effort to stimulate the economy. The thinking was, if people had more money in their paychecks, they’d spend more. And they did, according to Scott Hoyt, an economist at Moody’s Analytics.

“When the tax was cut, it gave consumers more money and that added to growth,” he says.

Consumer spending rose by about a $100 billion in 2011, adding more than half a percentage point to economic growth, says Hoyt. And he expects GDP to fall by a similar amount, now that the payroll tax has gone back up, because consumers won’t spend as much.

Consumers like Todd Winters, who stopped for a chat while getting lunch in downtown Washington. He figures he’ll pay about $2,000 a year more now in payroll taxes.

“Two thousand dollars is a nice vacation that I’ll have to figure out some way of making do without it,” he says.

Retailers will take the first hit as consumers start spending less. And the pain will spread through the rest of the economy fairly quickly, says economist Carey Leahey of Decision Economics.

“So it filters its way from the mall to the factory in probably a matter of four to 12 weeks,” he explains.

But not everybody thinks paying more payroll tax is such a bad thing. Chris Beard, an engineer in Saint Louis, says the Social Security Trust Fund needs all the money it can get.

“Obviously there’s concern about Social Security not being there in 20 years or so,” he says. “So I don’t know that we needed to be giving people a tax break out of that pot.”

Even if it does stimulate the economy.

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