Why your taxes may go up next year

COMMENTARY If you earn just north of $50,000 per year, a congressional failure to extend the payroll tax "holiday" would add about $1,000 to your 2012 taxes. People earning around $20,000 would pay an additional $400, while someone bringing home $123,000 would fork out roughly $2,200 extra. For the economy as a whole, that tax hike would shrink GDP and stifle the creation of as many as 1 million jobs. Some experts even think it could cause another recession.

That's what is at stake as Democrats on Capitol Hill push this week for a vote on whether to continue the temporary reduction in payroll taxes, which expires at the end of the year. A no-brainer? Well, in a way. Top Republican lawmakers oppose extending the tax break. Or rather, they oppose how their colleagues across the aisle intend to pay for the cut -- raising taxes on people who make more than $1 million a year.

A brief refresher. Payroll taxes are used to fund Social Security benefits. Workers contribute the equivalent of 12.4 percent of their annual salary, with employees and employers each chipping in 6.2 percent. As part of a deal last year to extend Bush-era tax rates for all Americans, Congress agreed to a one-year cut under which workers pay a payroll tax rate of only 4.2 percent. 

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Every paycheck at risk

Under a bill proposed Monday, Democrats are proposing to increase the size of that tax break for workers by another 1 percent or so. They also want to expand the tax cut to businesses so that employers would pay 3.1 percent on the first $5 million of their payroll, rather than the standard 6.2 percent rate. That would mean a sizable tax benefit for small businesses, the vast majority of which fall under that $5 million threshold.

Dems would fund the tax cut by imposing a 3.25 percent tax surcharge on earnings exceeding $1 million per year. In other words, a person making $1.2 million a year would pay the additional 3.25 percent on $200,000 in earnings, not her full income.

There is no doubt that raising taxes for most Americans in face of a global economic contraction is a lousy idea. Because of the payroll tax holiday, the average U.S. household had an additional $900 to spend -- spending that is critical to keeping the U.S. economy from sinking into another recession. Democratic lawmakers estimate that the latest tax cut extension would save the typical family $1,500 a year.

As the Center on Budget and Policy Priorities, a Washington think-tank, puts it, "every paycheck in America will shrink" unless Congress extends the cuts, harming "workers in nearly every job and income category." That could stop the shaky economy in its tracks. Analysts at Goldman Sachs (GS) project that letting the payroll tax cut lapse would immediately slice U.S. economic growth by as much as two-thirds of one percent. 

Safeguarding the super-rich

So why are Republicans, in principle the sworn enemies of taxes, effectively barring the door to tax relief that would put money in people's pockets and stimulate the economy? The Daily Beast's Michael Tomasky, noting that until recently senior GOPers supported the idea of payroll tax relief, nails it:

One, the idea was a Republican one back then; now it's a Kenyan one. That alone is enough to make it poison to them. Two, extending the holiday will help the economy at a moment when Republicans are now very clearly trying to hurt the economy. This is not even a controversial thing to say anymore, it's so obvious. And three, now there's a price tag on it; it has to be paid for in some way, and that way is a surtax on super-high incomes. And this above all is what the GOP cannot accept.

Of course, the parties may yet broker a deal to preserve the payroll tax cut. After all, stupidity still has political costs.

But if Tomasky's analysis is correct -- and Republican obstructionism on everything from the Obama administration's jobs plan to financial and environmental reform suggests he is -- it's not clear what sort of compromise might bring the GOP to the table. If electoral goals, not national economic imperatives, are what is guiding the party at this stage, then we could well see a repeat of the recent "supercommittee" fiasco.

If so, you'll know who to blame.

  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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