The White House, in its latest offer Monday to resolve the fiscal cliff, made a key concession that would be felt by every U.S. wage earner: allowing the expiration of the payroll tax cut, a provision that has lowered the workers’ share of Social Security taxes by two percentage points for the past two years. That translates into an average tax increase of about $1,000 a year for the typical American household making about $50,000 annually.
Letting the payroll tax rate revert to 6.2% from the current 4.2% would raise government revenue by about $125 billion next year, equivalent to 0.8% of total U.S. economic output, according to J.P. Morgan Chase.
Many forecasters say an increase in the payroll tax rate would damp consumer spending, weighing on the recovery. J.P. Morgan forecasts it would slow growth in 2012 by 0.6 percentage point, a sizable drag for an economy projected to expand by around 2% next year.