New Castle News

January 5, 2013

John K. Manna: Payroll tax rise will have impact on workers

John K. Manna
New Castle News

NEW CASTLE — If one thing can be taken away from the fiscal cliff deal, it is this: Beware of tax cuts.

While President Obama and Republican congressional leaders were wrangling over taxes for the rich and taxes for the not-so-rich, there was seldom any mention of the Social Security payroll tax.

Under a measure pushed by Obama, the payroll tax was reduced from 6.2 percent to 4.2 percent for 2011 and 2012 as a way to put more money in the pockets of most wage earners and spur the economy. Never mind that Social Security is facing insolvency and its own fiscal cliff.

Taxes may not be popular, but Americans weren’t screaming or even whispering to have a temporary reduction in the payroll tax. Since most people have the tax deducted from their paychecks, they came to expect a certain net earnings over the years.

Then came the reduction of two percentage points, which actually was a tax cut of 32 percent. It essentially was a windfall, putting more money in people’s pockets as Obama wanted. And people adjusted their lifestyles accordingly.

So now the reduction is gone. But although the tax is going back to its original level of 6.2 percent, it works out to a 47 percent increase.

Yes, it’s true. Wage earners received a 32 percent cut, but now face a 47 percent increase.

Those with $50,000 in wages, for example, have been paying $2,100. They will now pay an additional $1,000, or a total of $3,100 for the year.

People making $40,000, will pay an additional $800.

What makes the increase particularly brutal is that it will come out of every paycheck, and will be noticeable immediately.

For the $40,000 wage earners who get paid every two weeks, for example, the deduction will mean about $30 less in their paychecks.

From some accounts, people are already expressing their displeasure, saying the increase will be difficult to deal with.

This is a great example of why taxes shouldn’t be cut unless it can be guaranteed that they will never go up again. But we know that there are no such guarantees.

Whether this temporary cut made economic sense may be up for debate. But from a people standpoint, it may have been the unkindest cut of all.