‘Cliff’ Aside, Most To Pay More Taxes
Washington — Americans face a broad hike in taxes today 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.
Despite the emerging agreement to avoid much of the “fiscal cliff,” many Americans will see a higher tax bill this year 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.
The deal being discussed last night by Vice President Joe Biden and Senate Minority Leader Mitch McConnell, R-Ky., would address a separate tax — the income tax — and prevent tax rates from rising for all but the wealthiest Americans. But both parties have decided to leave the payroll tax out of the agreement.
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 as a result of the emerging deal, would make for the largest increase in taxes in about half a century.
But more likely is a deal that extends lower tax rates for families earning under $450,000. At the same time, higher-income earners would face steeper income taxes and potentially fewer tax breaks, as well as an already enacted new tax to pay for the Affordable Care Act health-care legislation.
For most American workers, the expiration of the payroll tax cut would be the only increase they experience.
With the end of the payroll tax holiday, a worker earning $50,000, for instance, will pay $1,000 more in taxes this year; a worker earning less than $20,000 a year will pay about $100 more. Someone in the upper fifth of households, making $150,000 a year, will pay about $2,200 more.
The increase in taxes on workers next year means that “the era of asymmetrical tax policy — where taxes can only go down — is over,” said Jared Bernstein, a former White House economic adviser. “What’s been weird is in this history of taxation in America, there’s been this long period when it’s been forbidden to increase taxes at all.”
While the Obama administration fought for the payroll tax cut in previous years to goose a weak economic recovery, the White House has been more ambivalent this year. Before the election, even as prominent Democratic economists and lawmakers argued in favor of extending the tax cut, the White House declined to call for its renewal.
Then, during its post-election talks with Congressional Republicans, the Obama administration requested an extension. But Republican lawmakers were skeptical, viewing the payroll tax holiday as contributing to federal deficits because the Treasury had borrow money to replace payroll tax revenue, which ordinarily would go to fund Social Security. The administration quickly dropped the payroll tax cut from negotiations.
The tax hikes come after a period of tax cutting that began in 1997. That year, President Bill Clinton trimmed rates on investment income. President George W. Bush cut a wide range of taxes in six of his eight years in office, first as a response to projected budget surpluses and later in an effort to stimulate the economy.
President Obama continued the trend, cutting taxes in 2009 and then even more deeply in 2011, largely in response to the deep recession.
As a result, nearly half of American workers likely have never experienced a tax increase.
“We haven’t seen broad-based individual tax increases at the federal level in the last 30 years,” said Owen Zidar, an economist at the University of California. “In the 1960s through the 1980s, payroll tax increases affected most taxpayers, but the vast majority of broad-based tax changes have been cuts rather than increases.”
When considered as a percentage of the size of the nation’s overall economy, the tax hike set to occur today is likely to be largest in about 50 years, according to a study of previous tax policy changes by Jerry Tempalski, a tax analyst in the Treasury Department.
Payroll taxes last went up in 1988, when they increased by .72 percentage points.
Some very small tax hikes have taken effect in recent years, including an increase in taxes on cigarettes to pay for expanded health care for children and a tax on tanning salons to pay for Obama’s health care plan. Clinton hiked taxes in 1993, but that mainly affected the wealthy.