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Fiscal cliff deal may slow economy

Jan. 1, 2013 at 4:41 PM  |  Updated Jan. 1, 2013 at 11:16 PM   |   Comments

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WASHINGTON, Jan. 1 (UPI) -- Ending the payroll tax break, effectively cutting take-home pay for all wage earners, is likely to slow the U.S. economy in 2013, economists say.

J.P. Morgan Chase estimated that ending the cut of 2 percentage points that has reduced the payroll tax to 4.2 percent for the past two years would remove a total of $125 billion in income from paychecks a year, The Wall Street Journal reported. Several economists told the newspaper that would slow growth by half a percentage point in an economy now growing by only 2 percent annually.

Lewis Alexander, a Nomura economist, said that passing a deal and averting the fiscal cliff would give the economy only a short-term boost.

"We continue to anticipate a significant economic slowdown at the start of the year in response to fiscal drag and a contentious fiscal debate," he said.

The deal would end uncertainty about significant increases in taxes on dividends for middle-class investors. But there are other sources of uncertainty, including another round of negotiations on the federal debt limit.

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