by Brian Wolfman
The President campaigned emphatically on a tax plan that would raise taxes for people making more than $250,000. He was equally emphatic that he would not abide a tax bill that would raise taxes on middle-income working families. He said this many times. Democrats made the same point: We can't let the beleagured middle class pay more to Uncle Sam. And Republicans said the same thing — they just didn't want rich people to pay a penny more either. In fact, many Republicans supported the recent tax bill not because they favored it but because, they said, they could not live with themselves if their inaction allowed a tax increase for the non-rich (which would have been the effect of allowing the 2001 Bush-era income tax cuts to expire).
But a tax increase for middle-class working class families is exactly what the new tax legislation — The American Taxpayer Relief Act (ATRA) — effectively imposes, compared to what those families had been paying. And the President, the Democrats, and the Republicans knew this when they supported ATRA.
Why are workers' taxes going up? Because ATRA allowed the 2011 and 2012 payroll tax "holiday" to expire, meaning that, as of January 1, 2013, payroll taxes on wage income increased from 4.2% to 6.2%. But not on all wage income. The payroll tax is doubly regressive: Everyone pays the same rate, regardless of income, and only the first $113,700 in wage income is taxed. (The 2012 limit was $110,100, but ATRA raised the limit to $113,700 for 2013. For more information on payroll taxes, go here.)
The increase in payroll taxes has been discussed in the press since ATRA's enactment. But I did not realize until recently just how significant the increase is. According to the Tax Policy Center, a single worker with about $38,000 in wage income will pay nearly $700 more to Uncle Sam than she did last year. A childless couple with $58,000 in wage income will have to fork out over $1,000 more than last year. Even a single person making only $6,500 in 2013 will have to pay more in taxes. Check out the Tax Policy Center's analysis at various income levels. Better yet, check out the Center's tax calculator, which allows you to plug in income levels, family composition, and other variables and then compare tax outcomes under various tax laws, including the law pre- and post-ATRA.
Under ATRA, very high-income people will pay considerably more income tax. But the law's income tax hikes generally don't kick in until an individual's annual income hits $400,000 ($450,000 for joint filers). Moreover, because payroll taxes only apply to the first $113,700 in wage income, people with, say, $200,000 in wage income will get hit with the same tax increase in actual dollars as someone with $113,700 in wage income. Does that make sense?