During the fiscal cliff negotiations, both Democrats and Republicans were adamant about not raising taxes on the middle class. From the headlines, it seems that only higher income earners were targeted. The deal increased taxes on individuals earning at least $400,000 and households earning at least $450,000 back to Clinton-era levels, or from 35% to 39.6%. It also increased the estate, capital gains, and dividends taxes on the same income brackets. However, if the deal’s revenue measures were targeted towards raising taxes on the wealthy, why will 77% of Americans see their taxes increase?
Although the more publicized facets of the deal leave the middle class relatively unscathed, a closer look uncovers that the payroll tax cut was allowed to expire. The payroll tax will now be 6.2% as opposed to 4.2%. This will result in a $700 tax increase for the average worker, according to the Tax Policy Center (TPC). For an income of $50,000, the payroll tax cut saved about $1000 for the average American household in 2012. The TPC also estimates that households making between $40,000 to $50,000 will face an average increase of $579 in 2013, while households making between $50,000 and $75,000 will face an average increase of $822.
The marginal increases on the income tax brackets affect the top 2% of earners in the United States, not to mention the capping of some deductions for individuals making $250,000 and households making $300,000. Although these tax increases can be justified through poll numbers, the elimination of the payroll tax holiday was not favored. The extension of the payroll tax cut received bipartisan support, as 65% of Democrats and 57% of Republicans were in favor.
So with a tax increase that impacts such a large number of Americans, why was this extended? From the government’s perspective, the payroll tax increase will provide an estimated $125 billion in revenue that can be pumped back into the economy.
However, simple economics tells us that with a tax increase on such a wide base of income earners, a decrease in consumer spending will also follow. During an economic time in which the average consumer is already strapped, increasing the payroll tax is simply illogical. The fiscal cliff deal provided no spending cuts and essentially pushed our country’s economic state further down its unsustainable path. To tell Americans that economic crisis was averted, yet fundamentally renege on a promise to not increase taxes on the middle class is a failure of both the Republicans and Democrats.
If the United States is serious about reducing its debt and returning back to economic prosperity, increasing taxes on the average consumer without cutting back on any of its unnecessary expenditures is running a marathon in the wrong direction.