Payroll tax cuts will expire:
Taxes will rise on the middle class even if this deal passes, because it doesn’t include an extension of the payroll tax holiday. That means that the paychecks for more than 160 million Americans will be 2 percent smaller starting in January, as the payroll tax will jump from 4.2 percent to 6.2 percent. And a huge number of those hit will be middle class or working poor (Two-thirds of those in the bottom 20 percent would be affected by a payroll tax hike.).
Obama had proposed extending the payroll tax holiday, or something similar, in the first phase of the negotiations. But he dropped that demand weeks ago as his stimulus proposals shrunk rapidly. He’s not revisited the idea since then, and Republicans didn’t want it in there in the first place.
So whether this particular deal passes or not, it’s basically a given that the payroll tax holiday is going away, which means a $115 billion fiscal contraction this year directly from the pocketbooks of ordinary Americans. To put that in perspective, the sequester cuts that are so dreaded would cut about $110 billion this year — more or less the same amount.
This is a good thing because payroll taxes are already too low to fund Social Security and Medicare. Shaving a third off the Social Security tax would have simply dug the hole deeper.