Looming Tax Increase

By :: November 16th, 2011

A year ago, the big worry in Washington was whether Congress would extend the Bush tax cuts before their end-of-year expiration. Failure would have meant a huge tax hike.

This year the question is whether the super committee will produce a budget plan before its Thanksgiving deadline. Failure could mean huge spending cuts.

Meanwhile, nobody seems worried about the $110 billion tax increase on workers set to hit on January 1.

Last December’s tax bill cut the worker’s share of the FICA tax that funds Social Security by 2 percentage points—an average of just over $900 each for 120 million households. That money surely boosted consumer purchases as it dribbled into workers’ paychecks throughout the year. But six weeks from now it disappears like Cinderella’s coach at midnight.

Two months ago the president proposed to boost the tax cut by half for 2012—to 3.1 percent—as part of his American Jobs Act. We know how far that’s gotten. Since Senate Republicans basically tabled the bill last month, Democrats have reintroduced it piecemeal. They failed repeatedly until last week when the Senate passed a handful of jobs subsidies for veterans, a political no-brainer right before Veterans’ Day.

Maybe Democrats plan to bring up the payroll tax cut after the super committee fails to offer a budget plan next week. Maybe they’ll wait longer to build pressure as the year winds down. I have no idea—I’m just an economist.

What I do know is that if Congress does nothing, biweekly paychecks will shrink in January by an average of about $35, just as the holiday bills arrive. That surely won’t help consumer spending.

If Congress does extend the larger payroll tax cut through 2012, the average worker will keep that $35 plus an additional $20 or so every two weeks. That’s not a lot but over the year, it adds up to an extra $170 billion of potential spending.

I suspect that Congress will go down to the deadline again this year as political calculations determine what happens when. In the end, we’ll have another year of reduced payroll taxes, maybe the same as this year, maybe more. If that’s all we’re going to get, the least the good folks on Capitol Hill can do is deliver well ahead of the holidays.

4Comments

  1. Michael Bindner  ::  10:32 am on November 16th, 2011:

    This ill advised cut cannot go on forever. A better source of income would be to, as part of a larger deal, increase the child tax credit while doing away with the mortgage interest deduction and property tax deduction, while melding in the child tax deduction and EITC. It only takes one GOP senator or house member on the committee to bring this to the floor and 25 GOP House members to go along with a solid Democratic caucus (which is hardly unlikely given the number who broke ranks with the Tea Party on the 2011 budget deal and debt limit extension. I see no need for pessimism or a desire to extend this disasterous tax cut. The GOP leadership will likely go along, tacitly, if they look honestly at their electoral prospects in 2012 (and the mediocre fundraising by their newest members in districts where they will face strong opposition). I am not only an economist, I am a politician. The GOP has no reason not to geek, at least behind the scenes.

  2. David Engage America  ::  12:58 pm on November 16th, 2011:

    In this economic and political climate it seems particularly difficult to figure out what the best method to increase personal spending is.

    We learned from the first payroll tax cut, and many other temporary tax cuts, that short-term changes in income does not have a big effect on people’s spending habits. http://eng.am/qsFK2y

    The other side of the coin is to use stimulus to increase spending, but at this point that seems politically unrealistic given the feelings surrounding the last stimulus package.

    The best option seems to be implementing some long-term measure or something that has long-term effects on spending. But what that measure is seems unknown at the moment.

  3. AMTbuff  ::  1:37 pm on November 16th, 2011:

    I’m wondering how the AMT relief political games will play out in 2012. If nothing is enacted by April 2013, millions of upper middle class Americans will find that they owe $4000 additional tax with no increase in income. Such an outcome seems impossible under normal circumstances, but it might happen if we face a Greece-scale financial panic.

  4. Ralph H  ::  5:57 pm on November 17th, 2011:

    I am confused about Mr Obama’s tax policy. He keeps trying to give tax cuts to us, all the while setting us up for a whopper of an increase in January of 2013 when the Bush tax cuts expire. Meanwhile, he keeps telling all that we need to increase revenues. The Repubs keep lobbying for across the board cuts in tax rates, while crying about the deficit, so they are no better. OK, I know he only wants the upper income guys to pay more, but when nearly half of the families pay no income tax, logically this seems like a real revenue problem.

    As an employer, this scares the hell out of me and makes me hesitant to expand. With Obama care looming, I wonder if I can keep offering health insurance or if my workers would be better off thrown into the pool; at least some of them would get a subsidized ride.

    Sorry for the rant, but perhaps those of you not involved in hiring or running a business can see how Mr Jeckel and Hyde can create an unsettling environment where planning is difficult.

    One general question: If Congress passes extention of Bush cuts can the President unilaterally alter this so only middle income taxpayers receive extention?