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What Congress’s Inaction May Mean for Your Finances

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The apparent failure of Congress’s supercommittee to reach a deal on the deficit could give many employees the equivalent of a pay cut next year.

One of the issues on the table for the debt panel was whether to extend the payroll tax cut, which increased employees’ take-home pay by 2 percentage points this year. If Congress fails to take action by year’s end, consumers would feel the impact on several levels, experts say. First, their take-home pay will decrease.  The amount may not seem like much to some — the benefit tops out at around $2,100 per year for anyone making $106,800 or more — but after a year of using that money to cover expenses or to boost savings, a cutback would require families to draw up a new budget for 2012, says Stuart Ritter, a certified financial planner at T. Rowe Price.

Even worse, higher payroll taxes could result in higher unemployment. An estimated 1.1 million people will lose their jobs if this cut gets eliminated, says Andrew Fieldhouse, federal budget policy analyst with the Economic Policy Institute, a think tank. Since consumers will have less money to spend, he says, that would result in fewer sales and a reduction of jobs. The ripple effect might not stop there. Ending the tax cut would slow economic growth by nearly one percentage point in 2012, says Fieldhouse. For investors, that could mean a fresh round of stock market losses to come.

To be sure, it’s still unknown whether Congress will move to extend this tax cut. A last-minute deal at the end of this year could still happen, especially if economic data and projections worsen and concerns about a spillover from Europe’s economic debt woes intensify, says Fieldhouse.

For now, though, experts say consumers budgeting for next year might want to exclude the extra money they’ve been receiving from the payroll tax cut. That won’t be easy, cautions Ritter, since it will require consumers to either cut back spending or to find new ways to make more money. He suggests families build up their emergency savings account – which should cover three to six months of living expenses – to protect themselves from any last minute surprises.

This emergency money, which should be in a savings or checking account, will be even more important if Congress allows extended unemployment benefits to expire at the end of this year; that’s another issue that’s at risk if the supercommittee collapses, Fieldhouse says. Benefits, which currently run for up to 99 weeks (this varies by state), could get slashed back down to 26 to 46 weeks.

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    • And that, Mr. Buffet, is how it ought to be done.I sure hate that word give, in this context, tugohh. Mr. Allen is surely expecting to profit* from this isn’t he? Doesn’t that make his gift an investment?* profit in the proper sense of the word.

    • I fully agree with you God. It’s the budget that needs to be slashed. $1.5 trillion of borrowed money on a $3.5 trillion budget is insane. Imagine if we all budgeted that way… All of the dems and repubs need to be kicked out of office. We need fiscal responsibilty, to survive. It will be painful, but probably no worse than it currently is. This deficit financing of our annual federal budgets HAS TO END! Unfortunately, sooner or later it will end, it has to, and the longer it is put off the more it will hurt.

    • The burning issues are national debt at $15 trillions and counting, and over-spending. Forget about the payroll tax cut and the unemployment benefits (e.g. rendering the recipients unemployable the longer we extend the benefits), they are all short-term events.

      I say lower the taxes, reducing spending, removing the rules and regulations that burden businesses, and create incentives for businesses to expand and hire. With unemployment rate stubbornly stands at 9%, our real estate market will not return even though the mortgage interest rates are at a historic low level.

      P.S. Not extending the Bush tax cut is the equivalent of a tax hike. Yes, a tax hike when our economy is in the doldrums and everybody is so poor. Stupid is as stupid does, but our career politicians don’t care.

    • What did we think the commitee was going to come up with? No spending cuts? This, in fact, may be the most politicaly palatable way to cut spending and reduce the deficit. Note, I did not say best way.
      Now all the congress has to do is figure out a way to boost a little tax revenue and the U.S. will be on its way to financial solvency.

    • All of the problems (e.g., 2% payroll taxes) discussed in the article are minor compared to the $600 billion to be cut from the Pentagon — alas, the Pentagon will bear its fair share of the burden — oh, and if the military-industrial complex wants to buy my vote to support their scam, it will take a lot more than a 2% payroll tax deduction to win me over…

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