Working Americans receiving their first full paycheck of the year may have had a rude awakening today. Despite all the President’s promises not to raise taxes on the middle class, he did exactly that.
By allowing the payroll tax holiday to expire at the end of 2012, President Obama and Congress allowed the portion of Social Security payroll taxes collected directly from individuals to rise from 4.2 percent to 6.2 percent in 2013, thus raising the total tax workers pay from 13.3 percent to 15.3 percent. For someone earning $50,000 a year, this tax hike means $1,000 less in annual take-home pay.
Ordinary Americans, as President Obama often refers to the majority of Americans, were by no means spared the tax increases allowed in the fiscal cliff deal. Americans’ disposable income is getting cut any way you look at it. The higher Social Security payroll tax is just one direct example. Higher taxes on investors and small businesses will trickle down to other Americans primarily in the form of lower wages and salaries and fewer opportunities for career advancement.
Americans dreaming of starting their own businesses will particularly be affected. Among the 13 tax increases for 2013, investors providing much of the capital for start-up firms to get off the ground took multiple hits. The rate on dividends and capital gains increased from 15 percent to 20 percent for taxable incomes over $450,000 ($400,000 for single filers).
Additionally, Obamacare imposed—for the first time ever—a surcharge on investment disguised as payroll tax. It raised a 3.8 percent surtax on investment income for taxpayers with taxable income exceeding $250,000 ($200,000 for singles). This brings the top rate on capital gains and dividends to 23.8 percent. And this represents a second layer of tax on capital gains. Most capital gains in the U.S. are first taxed at the highest-in-the-world corporate income tax rate of 35 percent.
The large tax increase on dividends and capital gains makes it more difficult and more expensive for start-up firms to raise capital. In addition to hurting visionary entrepreneurs, the repercussions from higher tax barriers to capital for start-up firms will be felt in the economy in the form of fewer opportunities for innovation and slower growth in worker productivity—the engines of economic growth.
The fiscal cliff deal allowed taxes to go up on most Americans despite targeting particularly upper-income earners. And yet, when it comes to the nation’s finances, the fiscal cliff deal fixed exactly nothing. In fact, it increased federal spending by $47 billion on net. The President would do a better service to the American people if he grabbed the rudder of leadership and steered the nation’s budget path off the fiscal collision course it is now on.
The debt ceiling negotiations present such an opportunity. There is still a little time left to make the right choice to reduce the budget deficit by cutting spending.