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Political Brinksmanship Still Threatens US Economy


WASHINGTON (AP) â¿¿ Even if U.S. lawmakers avoid the so-called fiscal cliff, higher taxes and brinksmanship in Washington are likely to continue damaging the fragile economy well into 2013.

In the early hours of the new year, the Senate passed emergency legislation to prevent deep spending cuts and even bigger tax hikes from taking effect. But the measure ran into fierce opposition Tuesday from House Republicans, leaving unclear whether a final agreement could be reached before the current Congress ends Thursday.

The Senate version would raise taxes on individual incomes over $400,000 and household incomes over $450,000 and on the portion of estates that exceeds $5 million. House Republicans are reluctant to sign on to those tax hikes â¿¿ which would deliver some $600 billion in revenue over 10 years â¿¿ at least without more cuts in government spending.

The higher taxes on the wealthy would likely slow the economy a little bit. But a bigger drag would come from a tax hike Democrats and Republicans aren't even bothering to fight over: the end of a two-year Social Security tax cut. The so-called payroll tax is scheduled to bounce back up to 6.2 percent this year from 4.2 percent in 2011 and 2012, amounting to a $1,000 tax increase for someone earning $50,000 a year.

"It's a huge hit," says Joel Naroff, president of Naroff Economic Advisors. "It hits people whether they're making $10,000 or they're making $2 million. It doesn't matter who you are ... The lower your income, the more of your income you're (spending). So if you're taxes go up, it's going to come out of your spending." And that is bad news for an economy that is 70 percent consumer spending.

Mark Zandi, chief economist at Moody's Analytics, calculates that the higher payroll tax will reduce economic growth by 0.6 percentage points in 2013. The other possible tax increases â¿¿ including higher taxes on household incomes above $450,000 a year â¿¿ will slice just 0.15 percentage points off annual growth, Zandi said.

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