Economy may falter if tax cut expires Dec. 31 - USATODAY.com
Economists are growing more worried that Congress will not extend this year’s payroll-tax cut past Dec. 31, pulling up to $120 billion out of consumers’ pockets and cutting into already tepid forecasts for household spending in the first half of 2012.
The tax cut was approved as a temporary measure last fall. The law cut the tax paid by employees, which supports the Social Security program, to 4.2% of the first $106,800 of a worker’s income from 6.2%. That cut gave $1,000 back to a worker earning $50,000 a year.
The problem is that 70% of economists’ forecasts anticipate the cut would be extended in 2012, as the economy struggles and unemployment remains stubbornly high, said Randell Moore, editor of the Blue Chip Economic Indicators forecasting newsletter. Throw in the $30 billion at risk if Congress doesn’t agree to continue long-term unemployment compensation, which is also up for renewal, and it amounts to almost 1% of gross domestic product, said Joel Prakken, chairman of Macroeconomic Advisers in St. Louis.
“And it occurs quite quickly at the beginning of the year,” Prakken said. “It’s a meaningful drag.”
Without an extension, Mesirow Financial Chief Economist Diane Swonk said that consumer spending growth could slump as much as a third lower than the 1.7% annual rate she projects by mid-2012.
Real after-tax personal incomes would probably shrink instead of growing slightly, she added.
“What’s really disturbing is how little this has been discussed — like, not at all,” Swonk said. “Political analysts think renewal is not a sure thing. And that’s really scary. The timing on this couldn’t be worse, with Christmas coming and Europe in crisis.”