Payroll tax cuts likely to expire
by Liz Hester
With the looming fiscal cliff, not a lot of news organizations have been paying attention to the payroll tax cuts, set to expire at the end of the year. The New York Times’ Annie Lowrey wrote Monday that no matter who wins the election in November, it’s unlikely this particular tax cut will survive.
That means a tax hike starting Jan. 1 for about 160 million U.S. workers. Both Republicans and Democrats are more interested in focusing on the broader Bush-era tax cuts that are also set to expire and some independent economists said the economy could handle the increase despite continued weakness, Lowrey writes.
From her story:
Independent analysts say that the expiration of the tax cut could shave as much as a percentage point off economic output in 2013, and cost the economy as many as one million jobs. That is because the typical American family had $1,000 in additional income from the lower tax.
But there is still little desire to make an extension part of the negotiations that are under way to avert the huge tax increases and across-the-board spending cuts, known as the fiscal cliff, that will start in January without a deal. For example, without any action, the Bush-era tax cuts will expire and the military and other domestic spending programs will be reduced.
Despite this, it’s easy to see why the media are focusing on the fiscal cliff. Lori Montgomery wrote in the Washington Post that if Congress allows the nation to go over the fiscal cliff then 90 percent of Americans would have higher taxes.
A study published Monday by the nonpartisan Tax Policy Center finds that taxes would go up by a collective $536 billion next year, or about $3,500 per household, reducing after-tax income by about 6.2 percent.
But the impact would vary significantly by income level, the study found, ranging from a $412 jump for the lowest earners (a reduction of 3.7 percent in after-tax income) to $120,000 for the top 1 percent (a bite of 10.5 percent). Middle-income households — those earning between $40,000 and $65,000 a year — would see their taxes go up by an average of $2,000, the study found, leaving families with 4.4 percent less money to spend.
For most taxpayers, the bulk of the increase would be triggered by the scheduled expiration of tax cuts enacted in 2001 and 2003 during the George W. Bush administration. The expiration of President Obama’s payroll tax holiday, which shaves 2 percentage points off payments to Social Security, comes in a close second.
But the lowest earners would be hardest hit by the expiration of tax breaks enacted as part of Obama’s 2009 economic stimulus package, the study found. Those losses would include an expansion of the earned income tax credit and the child tax credit for working families, as well as a $2,500 credit for college tuition, which would shrink to $1,800 and be available for only two years instead of the current four.
The Associated Press reported the government could see a $500 billion in new revenue if all the cuts expired. That’s good news for government, especially as the federal deficit continues to climb.
But is it really the best policy to cut consumer’s income at a time of rising costs of living, increased inflation and wavering consumer confidence? It feels as if the economy is on the brink of either getting better or taking another downturn. If millions of Americans see a noticeable drop in income, it adds yet another strain.
No one likes higher taxes and obviously the country needs to be more fiscally responsible, but seems as if a combination of cuts and higher taxes would better serve the current state.