In recent resolution to the so-called fiscal cliff, income tax rates are rising on a very small percentage of high-income earners. But, as N.C. State University economist Mike Walden explains, there was another tax increase that will affect many more people.
“Yes …, it’s the payroll tax, and it’s going up. The payroll tax had been 4.2 percent on the first roughly $110,000 of earnings for an individual. It’s now going up to 6.2 percent. Now the 4.2 percent was temporary. It’s been temporary for the last couple of years. The president and Congress lowered it in order to get people more disposable income and help the economy. But our elected leaders and their wisdom said, ‘O.K., temporary is over. We’re going back to the full 6.2 percent.’
“Now where does that payroll tax revenue go? It goes … to fund Social Security. And indeed many say that, ‘Well, although it would be nice to pay a lower payroll tax, hey, we look at the future of Social Security, it’s going to have some problems. It’s likely going to run out of its surplus of its investments, if you will, in about 20 years. And it won’t be able to pay full benefits.’ So, some would argue that we need to have that payroll tax back to its normal level in order to help with the solvency of Social Security.
“But this will mean that everyone – not just the very rich, but everyone – (is) going to see their paychecks, after they take account of deductions, go down a little bit starting this year.”