Obama’s wrong: This ‘cliff’ deal still raises taxes on the middle class

December 31, 2012

This afternoon, President Obama spoke while surrounded by an ad hoc group of "middle-class Americans" who he promised would be protected from tax hikes by the 11th-hour "fiscal cliff" proposal. That's not what's going to happen.

"For the last few days, leaders in both parties have been working toward an agreement that will prevent a middle-class tax hike from hitting 98 percent of all Americans starting tomorrow," he said. "Preventing that tax hike has been my top priority, because the last thing folks, like the folks up here on this stage, can afford right now is to pay an extra $2,000 in taxes next year." The agreement that's been unveiled, however, would "make sure the taxes don’t go up on middle-class families," he continued. 

But Obama is wrong: Taxes will rise on the middle class even if this deal passes, because it doesn't include an extension of the payroll tax holiday. That means that the paychecks for more than 160 million Americans will be 2 percent smaller starting in January, as the payroll tax will jump from 4.2 percent to 6.2 percent. And a huge number of those hit will be middle class or working poor (Two-thirds of those in the bottom 20 percent would be affected by a payroll tax hike.). 

Obama had proposed extending the payroll tax holiday, or something similar, in the first phase of the negotiations. But he dropped that demand weeks ago as his stimulus proposals shrunk rapidly. He's not revisited the idea since then, and Republicans didn't want it in there in the first place. 


(Source: Bloomberg)

So whether this particular deal passes or not, it's basically a given that the payroll tax holiday is going away, which means a $115 billion fiscal contraction this year directly from the pocketbooks of ordinary Americans. To put that in perspective, the sequester cuts that are so dreaded would cut about $110 billion this year — more or less the same amount. While the fiscal cliff deal will save middle-class families an extra $2,000 in tax pain by extending the Bush tax cuts, anyone who earns $50,000 a year will still be hit with a $1,000 higher payroll tax burden.

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