What the Fiscal Cliff Compromise Means for Most Americans

SocialMonsters
May 9, 2013

The best news for poor and middle-class families is that the compromise made between the White House and Congressional Republicans will keep federal unemployment benefits in place. The less-than-positive news is multi-faceted, as small businesses face several new taxes, higher rates on existing taxes, and the forthcoming provisions of the Affordable Care Act set to commence in 2014. A survey by Manpower suggests that more employers will be adding workers as opposed to reducing them in the first quarter of 2013. But businesses will ultimately have to adjust to the new tax environment. The following are the most important aspects of the fiscal compromise that will effect you and your family.

Social Security Tax Holiday Over

Neither President Obama nor Mitt Romney spoke about the Social Security payroll tax and the cuts that expired on Jan. 1. The federal government funds Social Security with a 12.4 percent income tax, which the employer and employee each pay half. President Obama cut the employees’ share from 6.2 percent to 4.2 percent for 2011 and 2012.¹ The expiration of this holiday means the average low-wage worker earning $8 per hour will pay $1032 in 2013 in Social Security taxes, as opposed to $700 paid in 2012. Though 10 U.S. states raised minimum wage for 2013, the Social Security tax increase will effectively negate the gains millions of workers would have received.² Some families who are already struggling will need to find ways to earn more money or obtain a cash advance in the short term to mitigate the impact of this tax increase.

Businesses Scaling Back

Virtually every American has less disposable income due to tax increases in 2013, regardless of income level. Americans earning $400,000 per year ($450,00 for families) will now pay a 39.6 percent tax rate, as opposed to 35 percent (in addition to the Social Security increase). Less income for everyone means less overall spending.³ Small business owners who are partners in LLC’s and S-corporations will now pay a 3.8 percent Medicare surtax on all unearned income, including capital gains, interest and even rent payments. Higher earners (over $400,000) will also see a 0.9 percent Medicare payroll tax increase. Companies will be unable to give raises or hire more employees as sales are sure to stagnate in the first quarter. Some employers may even reduce staff not only to compensate for increased taxes and slower sales, but to reduce their workforce to under 50 full-time employees. All companies with more will be required to provide healthcare coverage by 2014.⁴

Silver Lining

Though much of the fiscal cliff deals contains higher taxes, it saved several programs that were headed for the chopping block. $2.5 billion was scheduled to be cut from the National Institute of Health, which funds several major universities’ cancer research. $4.1 billion would have been slashed from education, effectively ending Head Start and special education programs in almost every state. Veterans and other military personnel would have been effected most, as $55 billion was scheduled to be cut from the Pentagon’s budgets.⁵ This would have caused mass layoffs, cuts to veterans’ benefits, and mass re-negotiations of military contracts.

1 http://blogs.wsj.com/economics/2013/01/01/payroll-tax-cut-expires-how-much-more-will-you-pay/

2 http://money.cnn.com/2012/12/28/news/economy/fiscal-cliff-middle-class/index.html

3 http://www.theroot.com/buzz/10-states-increase-minimum-wage-2013

4 http://www.forbes.com/sites/gracemarieturner/2013/01/02/as-2013-begins-get-ready-for-an-obamacare-tax-onslaught/

5 http://www.businessinsider.com/10-devastating-sequestration-cuts-that-people-are-afraid-will-happen-2012-12#billions-of-dollars-in-cuts-in-federal-cancer-research-funding-1