Tags: Payroll | Tax | Deadlock | US

Payroll-Tax Deadlock May Put US on Recession’s Edge

By    |   Wednesday, 21 Dec 2011 12:16 PM

The payroll-tax deadlock might put the economy on the edge of recession. Any shock, such as fallout from the eurozone crisis, would send it into a recession for sure, some economists warn.

Gross domestic product, or GDP, may fall 0.4 percent in the first quarter if Congress doesn't extend the payroll-tax cut scheduled to expire Dec. 31, predict economists surveyed by CNNMoney.

Without action, taxes for Social Security on the first $106,000 of wages will rise from 4.2 percent back to 6.2 percent.
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The extra money staying in worker's paychecks, which can be up to $2,000, is kick-starting the economy as consumers spend the extra cash, funneling it through the financial system, many economists believe.

With no payroll-tax cut, growth could slow so much that an impact like problems spreading from the European financial crisis could nudge the economy into recession.

"Given that the payroll tax holiday is having a meaningful impact, removing it would mean we're essentially at stall speed for the economy, and we would become quite worried about the expansion," Sal Guatieri senior economist with BMO Capital Markets told CNNMoney.

The Obama administration and politicians on both sides of the aisle claim they want to extend the tax cut but disagree on how to pay for it.

Extending it for a year is estimated to cost $120 billion.

The payroll-tax cut isn't the only issue deadlocked in Congress that could hurt taxpayers and the economy. Politicians are also still wrangling over an extending jobless benefits and changing the alternative minimum tax to ease taxes for many in the middleclass.

Gridlock over the issue might actually good because it will restore funds to Social Security, USA Today states in an editorial.

It would also help the deficit and disprove the belief that so-called temporary tax cuts should be indefinite, the editorial argues.

Social Security is already paying out more than it's collecting, and an extension would increase the federal deficit by more than $100 billion next year.

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The payroll-tax deadlock might put the economy on the edge of recession. Any shock, such as fallout from the eurozone crisis, would send it into a recession for sure, some economists warn. Gross domestic product, or GDP, may fall 0.4 percent in the first quarter if...
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2011-16-21
Wednesday, 21 Dec 2011 12:16 PM
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