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Many will feel sting of payroll tax hike

‘Holiday’ was intended to be temporary

By The Mercury

Well, Congress did something, finally. It was a day late, many hundreds of billions of dollars short, and it postpones the most difficult decisions yet again.

But the legislation the Senate overwhelmingly approved and the House passed — less convincingly but still in bipartisanship fashion — did constitute progress.

Understandably, most of the attention will go to the higher taxes on the wealthy. But Americans who aren’t wealthy ought to recognize that they, too, will be paying higher taxes — immediately.

We refer to the expiration of the Social Security payroll tax cut — sometimes called a tax holiday — which has been in effect for two years. Some folks will consider the expiration a tax hike — and it will feel like one — but the cut was never intended to be permanent. The Social Security tax cut was enacted in 2010 to stimulate the economy in the throes of the national recession.

The cut pumped about $120 billion a year into the economy, which was needed. But it also cost the federal government $120 billion a year, and allowing it to continue indefinitely could undermine the Social Security System.

While the federal government ought to be concerned about billions (and trillions) of dollars, households have other priorities. Returning the Social Security payroll tax from the present 4.2 to the previous 6.2 percent will have a direct impact on millions of Americans. A 2-percent tax increase on someone earning $50,000 a year will siphon off $1,000 a year — about $20 a week. And although the tax does not apply to a worker’s earnings in excess of $113,700, if both spouses earn $50,000, the higher tax would mean a $2,000 annual hit to their household income.

For some workers, the change will be an inconvenience, perhaps leading to cutbacks in entertainment. For others — those for whom $20 a week is precious — it will bring acute pain.

The expiration of the Social Security payroll tax cut also could result in a drag on the economy, for the simple reason that the 160 million Americans who will be affected will have less money to spend. The investment bank JP Morgan Chase has predicted that the additional payroll tax will lead to a reduction in consumer spending of up to $100 billion this year.

That alone isn’t expected to push the country back into a recession — how Congress confronts spending will have a much greater impact — but it will complicate the recovery.

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