Your paycheck is about to take a dive. The culprit: Payroll tax relief is set expire at the end of the year and Congress is unlikely to extend it, The New York Times reported on Monday.
On average, middle-income families have enjoyed around $1,000 in additional income from the payroll tax cut this year. The temporary tax cut lowered workers' tax rates from 6.2 percent to 4.2 percent on wages up to $110,000. The result was to give Americans a few extra bucks of spending money each month, a move that the government had hoped would stimulate the economy.
But after the payroll tax cuts come to a close at the end of the year, an American earning $50,000 annually will now pay at least $80 more per month in taxes. All together, the tax increase will affect as many 160 million American workers, according to the Times.
Coupled with a number of other tax cuts that are due to expire at the end of the year, including the Bush-era tax cuts, Americans can expect to pay on average $3,500 more in taxes.
And just as Americans will have higher taxes and fewer spending dollars overall next year, other consumer costs, especially food prices, are predicted to increase in 2013. In other words: American families are facing yet another year of belt-tightening -- no matter who is elected into the White House come November.
Some economists have argued for an extension of the payroll tax holiday -- or an alternative measure that would provide a similar benefit -- as stagnant wages and ongoing high unemployment continue to hurt low and middle-income families. Bigger paychecks mean more spending overall by Americans, some economists say, and that helps both the economy and families make ends meet.
The end of the payroll tax cut brings Americans that much closer to the edge of the so-called fiscal cliff -- a popular phrase used to describe the economic situation facing the nation as a host of other tax breaks are also set to expire at the end of 2012. There are also a number of automatic spending cuts that will go into place starting Jan. 1, 2013.
Like all tax breaks, the money has to come from somewhere. In the case of the payroll tax cut, it has come from Social Security. To make up for the decrease in tax revenue flowing into Social Security's trust fund this year, the government has borrowed from the general fund instead, Bloomberg reported.
That is one reason that neither neither Republicans nor Democrats have taken up the fight to extend the payroll tax cut. The tax cuts have also cost the government at least $120 billion, according to the Wall Street Journal. Now, that is money that Congress needs to shore up deficits in the budget overall.
Meanwhile, this past summer's drought, the worst to hit the United States in 50 years, is predicted to raise food prices significantly next year. As the U.S. Department of Agriculture projected, prices on everything from bread to chicken and milk are predicted to rise above the cost of inflation.