News Column

Deal Limits Middle Class Pain but Could Slow Recovery

January 2, 2013

By Tim Mullaney

The tax deal approved by Congress could slow the economic recovery by ending a 2-year-old payroll tax cut that gives many households at least $1,000 a year more to spend.

But in targeting the wealthiest households for most tax increases, the deal limits the anticipated economic damage from a broad array of tax increases touching middle-class taxpayers that took effect Tuesday. The measure also renews extended unemployment assistance for another year, benefiting 2 million people scheduled to lose their benefits this month.

The House passed the bill Tuesday night after Republicans abandoned efforts to add spending cuts to it.

The White House said the bill would raise $620 billion in revenue over 10 years. Of that amount, almost all would come from people with taxable incomes higher than $250,000 a year, said Roberton Williams, an economist at the Tax Policy Center (TPC) in Washington, D.C.

Income tax rates will rise for individuals making more than $400,000 a year and families making more than $450,000.

"If you assumed the payroll tax cut was intended to be temporary, most people won't see any change at all," Williams said.

The average tax filer making more than $1 million a year will see their tax rate rise by 5.2 percentage points, to 38.5%, according to TPC estimates. The average taxpayer earning $50,000 to $75,000 a year will see their rate rise 1.3 points, to 17.1%.

Excluding the payroll tax change, most families will see no change in their taxes from the deal. Including it, 77% of households will see taxes climb, the Tax Policy Center says.

The payroll tax boost is the tax change that's most likely to have a short-term economic impact, said economist Joel Naroff.

For a worker making $50,000 a year, it means a $1,000-a-year tax increase. The change will take about $2,275 out of the after-tax income of a worker making $113,700 a year, the maximum amount subject to payroll-tax withholding in 2012.

The measure could also hurt the economy by setting up a series of confrontations in Washington over spending and raising the debt ceiling through early 2013, Naroff said, hurting confidence of both consumers and executives.

The government hit its $16.4 trillion borrowing limit Monday. The Treasury Department says it can continue funding the government for about another two months using its existing authority.

"That means two more months of uncertainty while most taxpayers stew over the end of the payroll-tax holiday," Naroff said.

Source: Copyright USA TODAY 2013

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