Regardless of who wins the presidentialelection in November or what compromises Congress strikes in the lame-duck session to keep the economy from automatic tax increases and spending cuts, 160 million American wage earners will probably see their tax bills jump after Jan. 1.
That is when the temporary payroll tax holiday ends. Its expiration means less income in families’ pocketbooks — the tax increase would be about $95 billion in 2013 alone — at a time when the economy is little better than it was when the White House reached a deal on the tax break last year.
Independent analysts say that the expiration of the tax cut could shave as much as a percentage point off economic output in 2013, and cost the economy as many as one million jobs. That is because the typical American family had $1,000 in additional income from the lower tax.
But there is still littledesire to make an extension part of thenegotiations that are under way to avert the huge tax increases and across-the-board spending cuts, known as the fiscal cliff, that will start in January without a deal. For example, without any action, the Bush-era tax cuts willexpire and the military and other domestic spending programs will be reduced.
“This has to be a temporary tax cut,” said Timothy F. Geithner, the Treasury secretary, testifying before the Senate Budget Committee this year and voicing the viewof many in the WhiteHouse and on CapitolHill. “I don’t see any reason to consider supporting its extension.”
The White House hasnot pushed for an extension. “We’ll evaluate the question of whether we need to extend itat the end of the year when we’re looking at a whole range of issues,” Jay Carney, the White House press secretary, told reporters last month.
The original point of the payroll tax holiday was to stimulate consumer spending and aid middle-income households. But nowCongress needs the money as it struggles with vast deficits and believes the economy can withstand the expiration.
Many Republicans vehemently opposedits passage last year, as it would divert money from the Social Security program. Many Democrats fervently supported it last year but show no such enthusiasm now. Nancy Pelosi of California, the top House Democrat, hastold reporters she thinks it should expire.
Support is lacking for two main reasons. First, both Democrats and Republicans would rather focus on the broader political andeconomic issue of the fate of the Bush-era income tax cuts. These cuts, too, were initially meant to be temporary, butare now deeply entrenched in the tax code and central to the budget battle.
Second, though the economy has not become significantly stronger over the past year and the taxincreases in additionto spending cuts coming next year could push the country into a recession, independent economists say that the economy could shoulder the payroll tax increase without undue harm.
Moody’s Analytics, for instance, estimates that expiration of the payroll tax holiday would shave 0.6 percentage point off economic growth, adjusted for inflation, in 2013 — and that the economy could safely stomach government spending cuts and tax increases totaling up to 1.5 percentage points ofeconomic output.
Still, expiration of the payroll tax cut will increase the taxes of millions of middle-class families.
The fragile state of the recovery and thefrustratingly slow growth of the economy have heightened the stakes for the end-of-year negotiations. Economists estimate that if Congress fails to forestall or unwind the spending cuts and tax increases due to take effect next year,the hit could send country back into a recession .
The Federal Reserve currently estimates that the economy will grow 2.5 to 3 percent next year, and that the unemployment rate will be 7.6 to 7.9 percent, still painfully high.
The uncertainty in the United States is “currently a threat,” said Christine Lagarde, the managing director of the International Monetary Fund, pressing Congress last week to avoid the cliff. “It’s not a threat just for the United States of America. It’s a threatfor the global economy.”
Some economists have pushed for an extension of the payroll tax holiday to help support the recovery — or for its replacement with other measures to help the millions of low-income workingfamilies whose taxeswill rise when it expires.
The Economic Policy Institute, a liberal Washington-based research group, for instance, has said that the payroll tax cut has a stronger stimulative effect on the economy than many other tax cuts because the workinghouseholds that receive it tend to spend the money rather than save it. Thus, it estimates that the tax cut’s expiration could erase 0.9 percent of economic output and put up to a million jobs at risk.
It recommends replacing the payroll tax cut with infrastructure spending or fiscal aid to states, as a form of support for the recovery in the short term that would not have harmful long-term budget effects.
Some conservative economists have pressed for its extension as well, arguing that no Americans should have their taxes go up next year.
“Obama and Congress both need to hear this alarm clock, wake up, and get busy avoiding a payroll tax hike insult to the middle class’s injuries of stagnant wages and high unemployment,” wrote J. D. Foster, a fiscal specialist at the right-of-center Heritage Foundation.
The payroll tax holiday this year has reduced workers’ taxon wages up to$110,100 to 4.2 percent from 6.2 percent. In 2012 thattranslated into a$700 tax cut for a person making$35,000 a year and a$2,202 tax cut for workers making$110,100 and up.
Last winter, the White House pushed a resistant Congress hard for an extension, arguing itwas needed to support the flagging recovery. The White House set up a campaign for Americans to send in stories about what they would do with the extra $40 in theirpaychecks, and denounced Republicans as not wanting to aid the middle class.
“For the typical American family, it isa big deal. It means$40 extra in their paycheck. And that$40 helps to pay the rent, the groceries, the rising cost of gas,” President Obama said , standing with some of the families who had sent in stories.
The other provisions at stake in the fiscal cliff negotiations overshadow the payroll tax cut.
The Congressional Budget Office has calculated that according to current law, the federal deficit would fall by more than half a trillion dollars from the 2012 fiscal year to the 2013 fiscal year. The expiration of the Bush tax cuts and other provisionswould reduce the deficit by $221 billion.

A payroll tax cut is all politics and a stupid thing to do. It just make a problem with SS happen quicker.