Paychecks May Shrink
Even if lawmakers decide not to let tax rates rise, Americans' paychecks may shrink temporarily if Congress doesn't act soon.
If Congress doesn't vote in November, the IRS will advise employers to increase deductions from paychecks beginning Jan. 1, according to payroll experts. That's because the IRS needs time to prepare and distribute tables used to calculate withholding taxes, and employers need time to implement them.
Alec Phillips, an economist at Goldman Sachs, calculated in this week's research note that the U.S. gross domestic product would be cut by almost 2 percentage points if Congress doesn't extend the tax cuts, as well as temporary tax credits included in the 2009 stimulus bill and relief from the alternative minimum tax.
Even a temporary lapse in the tax provisions "would essentially wipe out most of the modest growth we expect in the first half of 2011," Phillips wrote. He said in a telephone interview that a higher tax rate in 2011's first two months would have that effect.
Dozens of Democrats in the House and at least five in the Senate have backed extending all the tax cuts for one or two years.
Republican Plan
House Republicans, who are vying in November's election to gain the 39 seats they need to take control of the chamber, yesterday announced a governing agenda that includes extending all of the tax cuts.
President Barack Obama has called it "irresponsible" for Congress to extend tax cuts for the higher income Americans because it would cost $700 billion in government revenue when lawmakers are looking to rein in deficits.
"I can't give tax cuts to the top 2% of Americans" and "lower the deficit at the same time," he said Sept. 20 during a town hall discussion on jobs and the economy on CNBC television.