The morning papers reported that our elected representatives “celebrated” New Year’s Eve a day early, staying up past midnight on December 30th trying to hammer out a deal to avoid the fiscal cliff. Despite making slow progress towards each other, the two sides so far haven’t managed to come up with just the right combination of continuing tax cuts, extension of unemployment benefits, tweaks to the formula for calculating how much Social Security benefits will increase for inflation, estate tax changes, fixes for the alternative minimum tax, tax increases for capital gains, and . . . wait, have I left anything out? As you can see, there are plenty of moving parts.
But deal or no deal, there seems to be one thing we can say for certain: Payroll taxes are going up. After enjoying a reduced rate for a couple of years, every wage earner in this country is going to have to pay an additional 2% of their income to the IRS to fund Social Security. We all use to fork over 6.2% of our paychecks to the IRS for Social Security; our employers had to pay the same amount per employee. In 2010, however, President Obama signed a law that reduced worker contributions to 4.2% (employers still had to contribute the higher amount). This temporary measure is expiring tomorrow, and one of the few things Republicans and Democrats seem to agree on is that they aren’t planning to extend it. Given that it was a fairly obvious example of robbing (future retiree) Peter to pay (still working) Paul, this seems like a sensible choice, if an unhappy one for all of us working stiffs.