The Capitol Building, where Congress convenes, in Washington, D.C.(Photo: J. Scott Applewhite, AP)
The tax deal approved by the House and Senate could slow the economic
recovery by ending a 2-year-old payroll tax cut that gives many
households at least $1,000 a year more to spend.
But in targeting
the wealthiest households for most tax increases, the bill would limit
the anticipated economic damage from a broad array of tax hikes touching
middle-class taxpayers that was to take effect Tuesday. The measure
also would renew extended unemployment assistance for another year,
benefiting 2 million people scheduled to lose their benefits this month.
The House passed the measure late New Year's Day. The bill postponed the start of across-the-board spending cuts for two months.
White House said the bill would raise $620 billion in revenue over 10
years. Of that amount, almost all would come from people with taxable
incomes higher than $250,000 a year, said Roberton Williams, an
economist at the Tax Policy Center (TPC) in Washington, D.C.
tax rates would rise for individuals making more than $400,000 a year
and families making more than $450,000. Middle-income taxpayers would
see their Social Security taxes, which were cut in 2011 and 2012 as a
temporary stimulus measure, revert to 2010 levels but see little other
impact from the bill, Williams said,
"If you assumed the payroll tax cut was intended to be temporary, most people won't see any change at all,'' Williams said.
to President Obama's earlier vow to raise taxes on households making
$250,000 a year, Williams said, "The president went from raising tax
rates on the top 2% to raising taxes on the top 0.7% (of the population)
and tax rates on less than that."
Those who will pay more will pay a lot more, Williams said, but rates would still be nowhere near historic peaks.
average tax filer making more than $1 million a year would see their
tax rate rise by 5.2 percentage points, to 38.5%, according to
preliminary TPC estimates.
The average taxpayer earning $50,000 to
$75,000 a year would see their rate rise 1.3 percentage points, to
17.1%. The impact on middle-class families would come from the
expiration of the payroll tax cut.
Excluding the payroll tax
change, most families would see no change in their taxes from the deal.
Including it, 77% of households would see taxes climb, the Tax Policy
The payroll tax boost is the tax change that's most likely to have a short-term economic impact, said economist Joel Naroff.
a worker making $50,000 a year, it means a $1,000-a-year tax increase.
The change would take about $2,275 out of the after-tax income of a
worker making $113,700 a year, the maximum amount subject to payroll-tax
withholding in 2012.
JPMorgan Chase has estimated restoring the
payroll tax from 4.2% to its previous level of 6.2% would boost federal
revenue by $125 billion a year. Consumer spending overall was about $11
trillion in 2012.
The measure could also hurt the economy by
setting up a series of confrontations in Washington over spending and
raising the debt ceiling through early 2013, Naroff said, hurting
confidence of consumers and executives alike. The government hit its
$16.4 trillion borrowing limit Monday. The Treasury Department says it
can continue funding the government for about another two months using
its existing authority.
"The situation is a disaster as we are
now facing a debt-ceiling cliff, rather than a fiscal cliff, and what
comes out of that is anyone's guess,'' Naroff said. "That means two more
months of uncertainty while most taxpayers stew over the end of the
payroll-tax holiday. The slowdown in the economy could offset most of
what growth the deficit cuts would have created this year. Dumb, dumb,
The deal also drew fire from critics of federal budget
deficits who said the measure's lack of spending cuts and broader tax
increases will fail to convince business leaders that it's safe to begin
hiring and investing soon.
"What it does is perpetuate the myth
that we can fix this through easy choices," said Maya MacGuineas,
president of the Committee for a Responsible Federal Budget, and an
organizer of Fix the Debt, a group of chief executives lobbying for a
long-term cut in the deficit. "It falls well short of what's needed to
add stability to the economy and confidence for businesses to make
investments and hire and do long-term planning.''