Politicians in Washington made much hubbub last week about a bipartisan deal to soften or postpone some $600 billion in scheduled tax hikes and government spending cuts. President Barack Obama said the deal would shield 98 percent of Americans from a middle-class tax hike.
Nevertheless, for most workers, rich and poor alike, taxes went up on Dec. 31 as a temporary payroll tax cut expired. That cut – a 2 percentage point reduction in a levy that funds Social Security – was put in place two years ago to help the economy, which was still smarting from the 2007-09 recession.
About 160 million workers pay this tax, and the increase will cost the average worker about $700 a year, according to the Tax Policy Center, a Washington think tank.
“It stinks,” said Beverly Renfroe, an accountant for a realty firm in Jackson, Mississippi. “I definitely noticed a decrease.” The pain will trickle through the economy over the next few weeks. Already, the new rate of 6.2 percent has trimmed paychecks for about half of the 200,000 employees whose paychecks are processed by Advantage Payroll Services, a payroll firm based in Auburn, Maine.
Oh dear, it seems to get worse:
Some Americans will also pay higher income taxes this year. Congress and Obama let income tax rates rise for households making more than $450,000 a year, a partial repeal of tax cuts put in place under President George W. Bush. The wealthy will also pay a new tax to help fund a health insurance reform passed in 2010.
These will have a smaller impact on the wider economy because they affect fewer people. But taken together, this year’s tax hikes could subtract a full percentage point from growth, Feroli said.
Most economists see economic growth of roughly 2 percent this year, a lackluster pace held back by the government’s austerity measures that is likely to do little to reduce unemployment.
Failure to postpone government spending cuts due to begin around March would slow growth more, further frustrating the economic recovery.
And worst still!
The blow to the economy from the tax hikes will hurt the most during the first half of the year as people adapt to their smaller paychecks.
Consumer spending, which drives more than two thirds of the economy, will likely grow at a mere 1 percent annual rate in the first quarter, and 1.5 percent in the second, said Sven Jari Stehn, an economist at Goldman Sachs in New York.
It’s all about the economy and alas we’re continuing to struggle out there. Hopefully when the current fiscal cliff compromise is reconsidered in the next couple of months or so Washington may consider to find ways to alleviate this new pressure. Hopefully someone out there will say wait a minute here, this isn’t helping us?
Well one can only hope, yes?
BTW, Washington Post is even more stark: “The bad news: The expiration of the payroll tax cut this January will basically wipe away all of last year’s gains.”