Paychecks shrink

The so-called “fiscal cliff” was averted New Year’s Day when the Republican U.S. House voted 257-167 to OK a patchwork compromise that had easily passed the Democratic Senate.

But Congress failed to reach any deal on sizable spending cuts – the whole point of the exercise – instead merely postponing an across-the-board “sequestration” by two months. Instead, the deal clears the path for an additional $4 trillion in new debt, notes Len Burman of Syracuse University.

So not only has the can been kicked down the road by a mere 60 days, but now a kind of fiscal perfect storm threatens, as Washington’s big spenders will also demand by the end of February another increase in what is becoming a largely fictitious ceiling on how much Uncle Sam can borrow. Those negotiations are likely to be even more contentious than the ones just completed – rightly so, because federal spending and the inflationary printing of currency that funds it are the country’s greatest problems.

Meantime, the biggest short-term impact on Nevadans – and 162 million other working Americans – will be the end of the 2 percent payroll tax holiday. To temporarily beef up take-home pay, Washington ordered employers two years back to stop deducting from paychecks most of the employee share of the taxes that supposedly fund Social Security – but which really flow directly to the general fund. (So much for the myth that Social Security is an insurance policy on which all workers pay an ongoing and appropriate premium.)

At any rate, those payroll deductions will be back as of this week, and every working American is likely to notice a lighter paycheck as a result.

The end of the payroll tax cut will add an average of $740 to every worker’s 2013 tax bill, according to Howard Gleckman at the Tax Policy Center. The Associated Press has estimated the hit to a two-earner family with six-figure incomes could be as high as $4,500.

That drop in take-home pay could impact consumer spending on basic goods, including groceries, clothing and gasoline, enough to “slow the U.S. economy in the first half of 2013 but not put it into recession,” in the opinion of David Kelly at J.P. Morgan Funds.

Add to that the fact that more elements of ObamaCare are about to kick in – costs to be borne first by employers, but eventually passed along to employees and customers – and does anyone believe this will lead to rapid recovery?

Nor did Congress forget to punish investment. The current tax structure already “double taxes all income that is saved and then spent in the future, rather than spent today,” says Scott Sumner of Bentley University. But under the New Year’s compromise, “the tax rate on investment income rises by even more than 5 percent. As far as I can tell the increase will be about 7.9 percent(age points) on people in my income bracket, and 8.8 percent on the very rich,” Mr. Sumner notes. “The GOP did get one minor victory; the dividend tax increase on the rich was scaled back from an absurd 28.4 percent to ‘only’ 8.8 percent. It will rise from 15 percent to 23.8 percent on the rich. Recall that dividend income is triple-taxed.”

And will those tax cuts at least take a bite out of the deficit?

“The president’s primary goal in the cliff negotiations was an increase in the top marginal income tax rate from 35 percent to 39.6 percent,” responds Marilyn R. Flowers, professor of economics at Ball State University. “Had the (income) threshold remained at $250,000, this would have raised enough money to fund the federal government for about a week. Given that the final threshold was $400,000, the revenue gain will be even less significant.”