published Wednesday, November 23rd, 2011

Economy could suffer if tax cut, jobless aid end

  • photo
    John Gooch files for unemployment at the Georgia Department of Labor office in Dalton, Ga.
    Staff File Photo by Margaret Fenton

By CHRISTOPHER S. RUGABER

AP Economics Writer

WASHINGTON — A tax cut that reaches 160 million Americans and government aid for the long-term unemployed will expire at the end of the year — sucking $165 billion out of the economy next year — unless Congress takes action.

Economists hoped the so-called congressional supercommittee would decide whether to extend both measures. But the committee couldn’t even agree on how to reach its main goal, cutting $1.2 trillion from the federal budget deficit.

If the tax cut goes away, the average family would pay about $1,000 more in taxes next year, the equivalent of an extra tank of gas every two weeks. Someone earning $100,000 would pay $2,000 more.

And if long-term unemployment benefits are allowed to expire, about 6 million people would lose weekly checks averaging about $300. For most of the long-term unemployed, that is their main source of income.

“There’s an awful lot of uncertainty ahead,” said Michael Hanson, senior U.S. economist at Bank of America Merrill Lynch.

Both changes would leave Americans with an estimated $165 billion less to spend. The Federal Reserve expects the economy to grow only 2.7 percent next year, and economists say the expiration of the two programs could reduce growth by a full percentage point.

The government said Tuesday that the economy grew at a 2 percent rate in July, August and September, down from earlier estimates of 2.5 percent.

To bring unemployment down significantly, the economy has to grow more than twice as fast as it grew this summer.

Congress could extend the tax cut and unemployment benefits when it returns from Thanksgiving recess next week. But the same partisan philosophical differences that sank the supercommittee could complicate the debate.

At the same time, Congress may be unwilling to force what is essentially a tax increase on tens of millions of Americans just as an election year begins.

Both measures were part of a deal struck in December 2010 by President Barack Obama and Republicans in Congress.

The cut applies to the tax that pays for Social Security. The tax applies to the first $106,800 a person makes in a year. The deal lowered the rate paid by individuals to 4.2 percent from 6.2 percent for this year. Companies also pay a 6.2 rate on their payroll.

Some Republicans have indicated they could support extending the tax cut, but there would almost certainly be a fight over how to pay for it. Without spending cuts or other tax increases, renewing the Social Security tax cut would swell the deficit.

Obama, as part of his jobs bill in September, Obama proposed lowering the rate further, to 3.1 percent, and cutting the employer portion to 3.1 percent up to the first $5 million on their payrolls.

Cuts at that level would pump almost $250 billion more into the economy compared with last year, when individuals and employers both paid the 6.2 percent rate.

Obama, speaking Tuesday in New Hampshire, urged Republicans to continue the tax break.

“Don’t be a Grinch,” the president said. “Don’t vote to raise taxes on working Americans during the holidays.”

On Monday, White House press secretary Jay Carney suggested that renewing or deepening the tax cut could be paid for by raising taxes on the wealthy. Republicans have refused to consider doing so.

Most states provide up to 26 weeks of unemployment benefits. The deal extended benefits to up to 99 weeks in states with the highest unemployment rates.

Unless that is renewed, almost 2.2 million people out of work will lose benefits by the first week in February. About 6 million people would lose weekly benefits by the end of the year.

Just the uncertainty of not knowing what Congress will do could cause businesses to hold back on hiring and investment, and therefore drag down economic growth, Hanson said.

Most economists would like to see lower budget deficits, but most would like the government to reduce the deficit gradually, to avoid hurting the weak economy. And they would all prefer robust economic growth to solve the problem.

The supercommittee’s failure triggers $1 trillion in automatic cuts in government spending beginning in 2013. Congress could undo them, but then credit rating agencies might downgrade the government’s long-term debt, as Standard & Poor’s did in August.

An even bigger hurdle looms at the end of 2012. That’s when the tax cuts passed during the Bush administration are set to expire. Losing those tax cuts would cost taxpayers up to an additional $4 trillion over 10 years.

Combined, all those factors would reduce growth in 2013 by between 1.5 and 3.5 percentage points, Douglas Elmendorf, director of the Congressional Budget Office, estimated last week.

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AP Writer Julie Pace contributed to this report.

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