Whether President Barack Obama or Mitt Romney wins the presidential election in November, there is one thing most Americans can likely look forward to next year: higher taxes.
The payroll tax holiday is scheduled to expire in Jan. 1 unless Congress manages to strike a deal to keep the U.S. from plunging off the so-called “fiscal cliff,” referring to the automatic tax increases and spending cuts that will occur if many temporary tax provisions are allowed to expire. As a result, about 160 million workers will see their tax bill rise next year, a cost that would lead to a $1,000 drop in income for the average American family.
The tax holiday reduced workers' taxes on wages up to $110,100 to 4.2 percent from 6.2 percent this year. In 2012, that translated into a $700 cut for a person making $35,000 a year and an approximately $2,200 savings for those making more than $110,100. The median U.S household income was $50,502 in 2011, according to the U.S. Census Bureau.
Still, The New York Times reports it is extremely unlikely that preserving the payroll tax cuts will be part of the negotiations underway to avert the fiscal cliff, even as some congressional leaders fight to preserve other tax breaks.
In recent months Democrats and Republicans have butted heads about the future of the George W. Bush-era tax cuts, which are also set to expire in January. While the Obama administration has been adamant about preserving those tax breaks for middle and lower-income earners, congressional Republicans -- who were against the payroll tax cuts, even though they largely benefited the middle class – are fighting tooth-and-nail to keep those tax breaks in place for the wealthiest Americans, even as they call for increased spending cuts to supposedly tackle the growing federal deficit.
Some economists claim the payroll tax cuts have done more to support the economic recovery than other stimulus measures because the working class households that receive it tend to spend that extra money rather than saving it. The liberal-leaning Economic Policy Institute reports the tax cut’s expiration could remove 0.9 percent of the nation’s economic output and potentially lead to the loss of up to a million U.S. jobs.
But extending those cuts also comes with a risk, since it would divert even more money from the already strapped Social Security and Medicare programs.
As of now, neither Democrats or Republicans are pushing for the payroll tax holiday. House Minority Leader Nancy Pelosi, D-Calif., who fervently supported those cuts last year recently told reporters she believes they should now expire, according to the New York Times. The White House has not pushed for an extension and last month, press secretary Jay Carney simply told reporters the president would evaluate the situation “when we’re looking at a whole range of issues.”
If Congress does nothing to revert the scheduled spending and tax cuts, the nonpartisan Tax Policy Center reports nearly 90 percent of working Americans would see their tax bill rise by an average of $3,500 per household.
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