Lawmakers on Monday morning were locked in negotiations trying to close a deal that would, in part, prevent a separate tax — the income tax — from rising for all but the wealthiest taxpayers.
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 in the new year, would make for the largest increase in taxes in about half a century.
While the end of the payroll tax holiday appears to be a near certainty, Democrats and Republicans agree in principle that low tax rates enacted under President George W. Bush should be extended for the vast majority of Americans — with negotiations over the exact threshold ongoing early Monday. If lawmakers fail to pass a law extending those tax cuts, allowing them to expire on Tuesday, it would mean thousands of dollars out of the pockets of average workers, the largest tax increase on Americans since World War II.
But if lawmakers seal a deal to extend Bush-era tax cuts for most Americans, the payroll tax cut expiry is the only tax increase that most workers would experience. Higher-income earners would face steeper income taxes and potentially fewer tax breaks, as well as a new tax to pay for the Affordable Care Act health-care legislation.
Because of the expiry of the payroll tax cut, a worker earning $50,000, for instance, would pay $1,000 more in taxes next year; meanwhile, a worker earning less than $20,000 a year would pay about $100 more in taxes. 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.
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