When lawmakers vow to make sure middle class taxes don’t rise by a penny, there’s one thing they’re invariably ignoring. Working Americans are poised to face a tax hike next year no matter the outcome of fiscal cliff negotiations.
Employees’ share of the Social Security payroll tax is set to rise by 2 percentage points in 2013 after being lowered to 4.2 percent for two years. President Obama and Speaker John Boehner are at an impasse in fiscal cliff talks, but they’ve effectively agreed to end the payroll tax holiday.
That alone means the average working American would take home $40 less per paycheck. Although it would raise the federal government’s revenue by more than $100 billion for the year, it would also cause a hit to the economy because those with lower incomes spend more of their earnings.
Ending the payroll tax cut and emergency unemployment compensation (which Democrats are more determined to extend) would together lower economic growth by 0.7 percent between 2012 and 2014, according to the nonpartisan Congressional Budget Office.
Democratic leaders have said they want to either extend the payroll tax holiday or enact something with comparable stimulative effects. But the White House’s latest offer to Boehner would end the tax break and instead make unspecified infrastructure investments. GOP proposals also end it. With no firm allies left, the costly tax cut is all but doomed.
Republicans don’t want to continue the tax break because they oppose short-term stimulus, a principle party leaders adopted shortly after Obama took office in 2009. They were bloodied in their failed effort to block a clean extension of the tax cut one year ago. This time around, neither the White House nor top Democrats are fighting for it. Liberals are happy to end the break because it taps a revenue stream dedicated to Social Security.
Anti-tax conservatives have been silent on the payroll tax, having written it off as a temporary patchwork measure destined to end. Instead they’re focusing their energies on pushing Republicans to block any legislation that would permit income taxes to rise in any way.
