So as the dust settles in the Congressional tax bill, you knew it would only be a matter of time before the hyperbole started.
And there it was.
Just a day after the tax deal was passed, the headlines were all over the place:
TAXES ARE GOING UP!
Taxes will rise for most Americans!
Higher payroll taxes target middle class!
Paychecks will be smaller!
And my personal favorite: As Payroll Taxes Rise, Bosses Are Forced To Break News Of Smaller Paychecks!
Let’s cut the drama and get a little context.
The payroll tax cuts that just expired took effect in 2011. The cuts were originally supposed to be temporary, one year cuts in withholding to make up for the loss of the expiring Making Work Pay Credit. The Making Work Pay Credit, which also applied to earned income, was authorized under the American Recovery and Reinvestment Act of 2009 and was expected to be a temporary cut. Each of those tax breaks lasted two years (sensing a pattern?).
While the Making Work Pay Credit was a flat dollar credit ($400 for individual taxpayers or $800 for married couples), the payroll tax cut was figured based on a percentage. With the payroll tax cut, payroll tax contributions on the employee side were reduced by 2%: instead of paying in at 6.2% for Social Security taxes, contributions were 4.2%. As earnings increased, so did the savings – up to the Social Security cap, that is, since no one pays into the system on wages above the cap (for 2012, the cap was $110,100). Savings ranged from $8 (for those just meeting the threshold) to $2,202 (for those at or in excess of the cap). Most taxpayers landed, as you can imagine, somewhere in the middle, at about $1,000.
$1,000 isn’t pocket change. If you’re paid weekly, however, it works out to about $20 per paycheck. I’ll bet, if they didn’t have it brought to their attention every few days lately (payroll tax cuts! payroll tax cuts!), most taxpayers didn’t even notice.
And it’s so unfair, we’re being told, that Congress waited until the last moment to act: it has completely thrown the middle class into a dither. Or not. You see, as happy as I am to cast aspersions on Congress for their last-minute shenanigans on most tax measures this week, the failure to extend the payroll tax cuts wasn’t a surprise. Congress has been signaling for months that they would not extend the payroll tax holiday.
However, that’s not my biggest gripe with the criticism over letting the tax cuts expire: the payroll taxes were meant to be temporary. One year. We made it to twice that. Letting those temporary tax provisions expire isn’t the same as increasing taxes. Your taxes aren’t going up – they’re returning to the historic rates: the same rates that have been in effect for more than 20 years. If the opposite had happened and rates went up and subsequently dropped (as is the plan in Philadelphia with our temporary sales tax increase), would we be so quick to label it a tax cut? I’ll bet not.
I wasn’t a fan of the payroll tax cuts when they were made law and I’m not sad to see them go. Tax breaks like this are silly. They pop in and out of taxpayers’ lives. They’re expensive and confusing for employers, tax professionals, and taxpayers. And goodness knows how much this cycling in and out of rules and tax forms costs us in federal dollars.
We need real tax reform, not temporary, patchy, feel-good measures. While it’s far from perfect, what the Senate and the House managed to push through this week is a step in the right direction. Baby steps, maybe. But at least it’s forward.
