Tax deal's short-run cost might be slower recovery

The tax deal approved by the House and Senate could slow the economic recovery by ending a 2-year-old payroll tax cut that gives many households at least $1,000 a year more to spend.

But in targeting the wealthiest households for most tax increases, the bill would limit the anticipated economic damage from a broad array of tax hikes touching middle-class taxpayers that was to take effect Tuesday. The measure also would renew extended unemployment assistance for another year, benefiting 2 million people scheduled to lose their benefits this month.

The House passed the measure late New Year's Day. The bill postponed the start of across-the-board spending cuts for two months.

The White House said the bill would raise $620 billion in revenue over 10 years. Of that amount, almost all would come from people with taxable incomes higher than $250,000 a year, said Roberton Williams, an economist at the Tax Policy Center (TPC) in Washington, D.C.

Income tax rates would rise for individuals making more than $400,000 a year and families making more than $450,000. Middle-income taxpayers would see their Social Security taxes, which were cut in 2011 and 2012 as a temporary stimulus measure, revert to 2010 levels but see little other impact from the bill, Williams said,

"If you assumed the payroll tax cut was intended to be temporary, most people won't see any change at all,'' Williams said.

Referring to President Obama's earlier vow to raise taxes on households making $250,000 a year, Williams said, "The president went from raising tax rates on the top 2% to raising taxes on the top 0.7% (of the population) and tax rates on less than that."

Those who will pay more will pay a lot more, Williams said, but rates would still be nowhere near historic peaks.

The average tax filer making more than $1 million a year would see their tax rate rise by 5.2 percentage points, to 38.5%, according to preliminary TPC estimates.

The average taxpayer earning $50,000 to $75,000 a year would see their rate rise 1.3 percentage points, to 17.1%. The impact on middle-class families would come from the expiration of the payroll tax cut.

Excluding the payroll tax change, most families would see no change in their taxes from the deal. Including it, 77% of households would see taxes climb, the Tax Policy Center says.

The payroll tax boost is the tax change that's most likely to have a short-term economic impact, said economist Joel Naroff.

For a worker making $50,000 a year, it means a $1,000-a-year tax increase. The change would take about $2,275 out of the after-tax income of a worker making $113,700 a year, the maximum amount subject to payroll-tax withholding in 2012.

JPMorgan Chase has estimated restoring the payroll tax from 4.2% to its previous level of 6.2% would boost federal revenue by $125 billion a year. Consumer spending overall was about $11 trillion in 2012.

The measure could also hurt the economy by setting up a series of confrontations in Washington over spending and raising the debt ceiling through early 2013, Naroff said, hurting confidence of consumers and executives alike. The government hit its $16.4 trillion borrowing limit Monday. The Treasury Department says it can continue funding the government for about another two months using its existing authority.

"The situation is a disaster as we are now facing a debt-ceiling cliff, rather than a fiscal cliff, and what comes out of that is anyone's guess,'' Naroff said. "That means two more months of uncertainty while most taxpayers stew over the end of the payroll-tax holiday. The slowdown in the economy could offset most of what growth the deficit cuts would have created this year. Dumb, dumb, dumb.''

The deal also drew fire from critics of federal budget deficits who said the measure's lack of spending cuts and broader tax increases will fail to convince business leaders that it's safe to begin hiring and investing soon.

"What it does is perpetuate the myth that we can fix this through easy choices," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, and an organizer of Fix the Debt, a group of chief executives lobbying for a long-term cut in the deficit. "It falls well short of what's needed to add stability to the economy and confidence for businesses to make investments and hire and do long-term planning.''

USA Today