After months of deliberation, posturing and enough political grandstanding to fill the Pacific, Congress passed a bi-partisan deal to avert the fiscal cliff sequestration cuts (for 2 months) and make permanent some of President Bush’s tax cuts. Left out of the deal is much in the way of spending cuts as well as an increase in the payroll tax meaning less take-home pay for nearly everyone.
Report from the Mercury News:
The key issue in the fiscal cliff debate in Washington was how much to raise taxes and on whom, with the deal ultimately sparing most Americans from an income tax increase.
But in a development that attracted less attention Congress allowed one type of tax to increase for most of us, the payroll tax, effectively cutting the take home pay of three quarters of American workers.
While Bay Area tax experts say many good things are to be found in the deal, including for the unemployed, middle-class parents of college students and the wealthy, the American Taxpayer Relief Act that Congress approved late Tuesday raises billions from workers and even those who are self employed by failing to extend a tax holiday that had reduced payroll taxes from 6.2 percent to 4.2 percent.
The tax money goes toward old-age, survivors and disability insurance, or what commonly shows up on people’s paychecks as Social Security Insurance, or SSI.
By some estimates, the failure to extend the tax holiday means that people who make $50,000 a year will pay $1,000 more in taxes this year.
The Tax Policy Center in Washington, D.C. estimates that the expiration of the payroll tax cut will affect 77.1 percent of U.S. households, who will see average increases of $1,635, according to Bloomberg News.
“For most middle-income tax payers, that’s the big change,” said Robert M. Caplan, a Foster City certified public accountant who is also a member of the
California Society of CPAs’ tax and estate planning committees. “With the exception of the payroll tax increase, for most people there was lots of good news.”
As with most pieces of legislation related to our fiscal situation in recent years, this bill does very little for the long term and merely has a band-aid effect for the short term.