WASHINGTON -- Americans are all but certain to face a broad hike in taxes today for the first time in at least two decades, ending a prolonged period of declining taxation that has become a defining characteristic of the American economy.
Regardless of whether President Barack Obama and Congress reach an agreement to avoid the "fiscal cliff," many Americans will see a higher tax bill because of the expiration of the payroll tax cut, which was enacted in 2011 as a temporary measure to boost economic growth. The tax holiday was preceded by a similar temporary cut in 2009 and 2010.
Lawmakers Monday were locked in negotiations trying to close a deal that would, in part, prevent a separate tax -- the income tax -- from rising for all but the wealthiest taxpayers.
Unlike income taxes, which rise along with earnings, the payroll tax is a fixed percentage of an employee's salary. Allowing the tax cut to expire will increase taxes on salaries by 2 percent for every American worker. Up to $110,100 a year in salary is subject to the tax.
This jump in payroll taxes, combined with other tax increases affecting the very wealthy likely to take effect in the new year, would make for the largest increase in taxes in about half a century.
While the end of the payroll tax holiday appears to be a near certainty, Democrats and Republicans agree in principle that low tax rates enacted under President George W. Bush should be extended for the vast majority of Americans -- with negotiations over the exact threshold ongoing. If lawmakers fail to pass a law extending those tax cuts, allowing them to expire today, it would mean thousands of dollars in taxes for average workers, the largest increase on Americans since World War II.
But if lawmakers seal a deal to extend Bush-era tax cuts for most Americans, the payroll tax cut expiration is the only tax increase that most workers would experience. Higher-income earners would face steeper income taxes and potentially fewer tax breaks, as well as a new tax to pay for the Affordable Care Act health-care law.
Because of the expiration of the payroll tax cut, a worker earning $50,000 would pay $1,000 more in taxes; meanwhile, a worker earning less than $20,000 a year would pay about $100 more in taxes. Someone in the upper fifth of households, making $150,000 a year, will pay about $2,200 more.
The increase in taxes on workers next year means that "the era of asymmetrical tax policy -- where taxes can only go down -- is over," said Jared Bernstein, a former White House economic adviser. "What's been weird is in this history of taxation in America, there's been this long period when it's been forbidden to increase taxes at all."
While the Obama administration fought for the payroll tax cut in previous years to goose a weak economic recovery, the White House has been more ambivalent this year. Before the election, even as prominent Democratic economists and lawmakers argued in favor of extending the tax cut, the White House declined to call for its renewal. Then, in its postelection talks with congressional Republicans, the Obama administration requested an extension.
But GOP lawmakers were skeptical, viewing the payroll tax holiday as contributing to federal deficits because the Treasury had to borrow to offset payroll tax revenue, which funds Social Security. The administration dropped the payroll tax cut from talks.