What about the payroll tax?
by digby
Since most Americans (including the media) don’t have the vaguest clue about what’s really going on with the fiscal cliff nonsense, I have to think this is likely to be problematic:
Americans are all but certain to face a broad hike in taxes on Tuesday for the first time in at least two decades, ending a prolonged period of declining taxation that has become a defining characteristic of the American economy.
Regardless of whether President Obama and Congress reach an agreement to avoid the “fiscal cliff,” many Americans will see a higher tax bill because of the expiration of the payroll tax cut, which was enacted in 2011 as a temporary measure to boost economic growth. The tax holiday was preceded by a similar temporary cut in 2009 and 2010.
Lawmakers on Monday morning were locked in negotiations trying to close a deal that would, in part, prevent a separate tax — the income tax — from rising for all but the wealthiest taxpayers.
Unlike income taxes, which rise along with a worker’s income, the payroll tax is a fixed percentage of an employee’s salary. Allowing the tax cut to expire will increase taxes on salaries by 2 percent for every American worker. Up to $110,100 a year in salary is subject to the tax…
This jump in payroll taxes, combined with other tax increases affecting the very wealthy likely to take effect in the new year, would make for the largest increase in taxes in about half a century.
Virtually everyone also believes that this payroll tax hike is likely to be the biggest drag on the economy in 2013. One reason why I think going over the cliff is a better strategy is that they would immediately pass tax cuts for the middle class and it might just be possible to add on an equivalent amount to the payroll tax cut and make it even steven. This would avoid a tax increase on the middle class entirely while going back to better funding of Social Security. I haven’t heard anyone talking about it, but it seems to me that someone should be thinking about the effect of this payroll tax hike, both politically and economically. Austerity is austerity. And workers are going to notice it and they are going to complain.
I don’t know who they’ll blame, but I would think it’s probably going to be the Party that’s made a fetish out of raising taxes over the last year. (I wouldn’t count on them understanding that the taxes the Democrats have been demanding be raised were different taxes than these.) In any case, I’m one hundred percent sure the Republicans will run on the fact that the Democratic president passed the biggest tax increase in half a century and that every worker got hit by it. And it will be true.
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