The New Year’s Day accord makes permanent tax rates that were scheduled to rise on 99 percent of Americans, sidestepping a huge tax hike for most Americans. The one exception is a higher tax rate on couples who earn $450,000 or more ($400,000 for individuals), which more or less fulfills President Barack Obama’s pledge to raise taxes on the wealthy. But virtually every worker will still get a smaller paycheck in 2013, because of another tax measure that expired. Beginning in 2009, Congress cut the payroll tax—which helps finance Social Security—to put a bit of extra spending money in workers’ pockets. The law was changed and extended, with the latest version cutting the tax from 6.2 percent of income to 4.2 percent. Congress has now allowed it to lapse for good. So in 2013, the rate will rise back to 6.2 percent and most workers will have an additional two percentage points of their income automatically deducted from their paychecks.
It’s notoriously difficult to roll back any tax cut, no matter how it’s labeled, which is why some politicians push for “temporary” tax cuts knowing full well that they may never be allowed to expire. That was the logic behind the 2001 and 2003 Bush tax cuts, which were supposed to expire at the end of 2010, but were extended for two years and are now effectively permanent, with the exception of the new top bracket. So letting a middle-class tax cut expire is an unusual move, and the fact that Obama and Congress allowed it to happen gives some clues about the financial crunch Washington still faces.