The deal negotiated by Vice President Biden and Senate Minority Leader Mitch McConnell (R-Ky.) and approved by the Senate early Tuesday addresses a separate tax — the income tax — and would prevent tax rates from increasing for all but the wealthiest Americans. But both sides have decided to leave the payroll tax out of the agreement.
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 increases 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 as a result of the deal, would make for the largest increase in taxes in about half a century.
With the country going over the fiscal cliff for at least a day because both houses of Congress did not approve the deal before the year-end deadline, a wide range of taxes went up Tuesday, although perhaps only for a matter of hours. If lawmakers ultimately fail to approve the tentative agreement, it would mean thousands of dollars would come out of the pockets of average workers, the largest tax increase on Americans since World War II.
But support continued to mount Tuesday for the deal, which would extend lower tax rates for families earning less than $450,000. At the same time, higher-income earners would face steeper income taxes and potentially fewer tax breaks, as well as an already enacted new tax to pay for the Affordable Care Act health-care legislation.
For most American workers, the expiration of the payroll tax cut would be the only increase they experience.
With the end of the payroll tax holiday, a worker earning $50,000, for instance, will pay $1,000 more in taxes this year; a worker earning less than $20,000 a year will pay about $100 more. Someone in the upper fifth of households, making $150,000 a year, will pay about $2,200 more.
The increase in taxes on workers 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.