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Most will face a rare tax increase with or without ‘fiscal cliff’ resolution

By Zachary A. Goldfarb,December 31, 2012

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When considered as a percentage of the size of the nation’s overall economy, the increase in taxes set to occur Tuesday is likely to be largest in about 50 years, according to a study of previous tax policy changes by Jerry Tempalski, a tax analyst in the Treasury Department.

Payroll taxes last went up in 1988, when they increased by 0.72 percentage points.

Some very small tax increases have taken effect in recent years, including an increase in levies on cigarettes to pay for expanded health care for children and a tax on tanning salons to pay for Obama’s health-care plan. Clinton raised taxes in 1993, but that mainly affected the wealthy. (By contrast, state and local taxes have been increasing over the years, in part to make up for budget shortfalls caused by the recession.)

Middle-class Americans will not only be wrestling with higher taxes this year; they will also be earning less than they did just five years ago.

“Many more households are living paycheck to paycheck than just a few years ago given the very tough economy and the decline in real incomes. This amplifies the negative fallout from the expiration of the payroll tax holiday,” said Mark Zandi, an economist with Moody’s Analytics. “The still very weak consumer confidence, due in part to lower real incomes, also reinforces the negative impact of the end of the holiday.”

Economists say the expiration of the tax cut will be a major drag on the economy this year. Estimates suggest it could cost between 500,000 and 1 million jobs, leaving the unemployment about 0.4 percentage points higher than it otherwise would be.

Tax increases on the wealthy, by contrast, are expected to have much less of an effect on the economy.

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