Biggest Middle Class Tax Increase in History Will Come in Five Months

Bruce Krasting's picture

There is one aspect of the final debt deal from DC that took me by surprise. I was convinced the 2% reduction in payroll taxes would be extended through 2012. On July 12th I wrote about this and  got it completely wrong. Not only did I think there would be a one year extension of the existing holiday; I forecast that the subsidy would actually be increased. I was steered in the wrong direction by the Boss himself. On July 11th Obama stated:

I want to be crystal clear. Nobody has talked about increasing taxes now. Nobody has talked about increasing taxes next year. We’re talking 2013 and the out years.

In the same press conference he added:

(cuts in FICA payroll taxes) would be a component of this overall package.

I don’t think the President said these words without having some sort of understanding with Speaker Boehner. Two weeks ago an economic stimulus was part of the plan. Today there is nothing. I think I understand what may have happened. When push came to shove the FICA holiday got shelved. That had to happen to get a deal done. Why? Because we are so broke we can’t afford the stimulus.

The deal that was reached to get the debt ceiling raised results in a 2012 reduction in expenses of only $21b. This comes to 1/8th of a percent of GDP. Meaningless. But if the tax holiday had been rolled for another year it would have resulted in $120b of additional 2012 expenses (net -$100b). This amount (plus the interest on it) would have wrecked the economics of the overall plan. So what was originally hailed as a good idea (by both sides) was shot down in the end.

I think this is an important development. It points to two things. The first is that we are economically vulnerable and we have no traditional responses. The second is that we are going to hit a very big economic wall on January 1, 2012.

As of the first of the year taxes on payrolls are going up by 2% across the board. This will suck $10b a month out of consumer’s pockets. I think it will prove to be a critical $10b.

The reason that the current stimulus was directed at FICA taxes is that this was the most progressive way to provide some relief. Those same individuals/families (average income of $37,000) will be hurt the hardest when the rates go back up. For a family with two average incomes the tax increase comes to $1,500 a year.

Will that make a difference? You bet it will. Toward the end of the month many families will get squeezed. (Good luck with your Wal-Mart stock when that starts to happen.)

The $120b in increased taxes will translate to a direct reduction of consumer spending. As a result, GDP will take a hit. The move to FICA taxes will, by itself, reduce GDP by 1/2 to 3/4%. That is a very big deal. One would have to be blind not to recognize that the economy is currently approaching stall speed. And now we have introduced another big headwind. That wind will be blowing in our face in less than five months.

The debt limit crisis has forced the political leaders in DC to throw out the Keynesian playbook. In the end this might be a good thing. But it is going to hurt like hell this winter. Sometime around February we are going to hit a very cold and solid wall. The economy could tank.

Possibly some readers can answer these questions:

Did Obama completely crater on this?

Absolutely! Not only did he fold on his base (middle class) he put a landmine in the economy for 2012. Exactly the worst thing for a guy to do when running for office.

Did Boehner also get outmaneuvered?
I think he was forced to fold on the FICA stimulus. I’m convinced he wanted to extend the tax holiday. A bad economy is bad for Republicans too.

Is our government functioning properly?

Absolutely not! We may have just made the same (similar) mistakes that were made in 1937. I think all of Washington has folded on their responsibilities.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
hooligan2009's picture

bruce, I don't think the tax increase is a world of pain. taxes need to go up by around 10% of GDP or by around 1/3 for all of us to stop living in cloud cuckoo land, where we expect something for nothing. Either taxes go up or spending comes down. Personally I think spending has to come down and we should get smarter in what we spend money on. I don't think there is a single Government department that couldn't produce more for 40% less if we got our best and brightest involved in proving me right. orient a reward culture for universities to get students to use logisitics and quantitative methods to rip apart all the current ways of doing things and give them half or a quarter of the first years savings. mediated by some sort of jury system of 100 taken by a similar method as we emply for selecting jurors for court cases.

TBT or not TBT's picture

Here's a better plan: Delete, permanantly, a good dozen federal departments.

dolly madison's picture

"bruce, I don't think the tax increase is a world of pain" said the person who was not as close to the edge as many.

hooligan2009's picture

:) at the junkers! and i will be 2 on this site next week! cornflakes anyone?

Newsboy's picture

"Balanced approach" Barak Obama

metastar's picture

There is nothing that the Bernank can't solve (for the uber rich) using QE.

Wait for it. It will come.

optimator's picture

Nice timing, sheeple on vacation, will see a little surprise when they check the news and their 401 this evening.  Will decide to get out of their funds tomorrow and avoid even further losses?

anonnn's picture

"On July 12th I wrote about this and got it completely wrong."

Ummm, Bruce? What did you learn from your experience?

Seasmoke's picture

the middle class has only 2 options to survive......

1. to steal and cheat their way into the upper class

2. to check out of the economoy and grab entitlements and deal/work/barter in the underground economy

JW n FL's picture


You made my Twitter and FaceBook!

Good Job My Man!! Keep it up!!

Please Sir, if you would be so kind.

anonnn's picture

"...we are economically vulnerable and we have no traditional responses."

So fairness, aka justice, is not traditional in America? What else is new?

PulauHantu29's picture

"No one saw this coming," the Bankers testified before Congress.

Atlantis Consigliore's picture

Watch 700,000 business with 2 million workers layoff, ahead of 2013

and vote with capital.

Go offshore or into underground economy

cash underground economy, as business Capital votes.


count on it.   We just became a 3rd world economy,

falak pema's picture

the best recent debate so far on ZH is on the energy scene. The guy from Oil drum made a very strong case for mind set change, paradigm change. TY ZH I enjoyed it!

Riquin's picture

We are in a depression, all my personal indicators I keep are pointing to a bad depression with a government that is not functional. God Save Us !!!

falak pema's picture

time to milk the fat cows... pity it didn't start in 2011.

Thisson's picture

Bruce, you're incorrect:


The change to FICA will not change GDP.  GDP = C+I+G+X.  If you decrease the payroll tax, you decrease C (consumption) and increase G (government spending) by an identical amount.  Ceterus Paribus applies.  As a practical matter, the only way GDP changes is if government net deficit levels change.


I also largely agree with CHS's post on how to create jobs: let housing prices collapse, kill the TBTF banks, and end socialized medicine replacing it with: (1) cash-on-the-barrel payments combined with (2) catastrophic insurance that covers the big ticket items (cancer, etc.).

hooligan2009's picture

a decrease in consumption will result from a tax increase, so C drops..but..the box has an outside. 2% increase in taxes will reduce the deficit, you get a reduction in the G component as the deficit reduces. welcome to the land of smoke and mirrors. increasing deficits increase GDP since they represent an injection of increased spending..reducing deficits by tax increases actually reduces GDP and are therefore contractionary to GDP..this is a double whammy. bruce is correct

Dr. Acula's picture

>Ceterus Paribus

You mean "ceteris paribus".

sessinpo's picture

That would be old economic thinking. An increase in government spending is no longer a function of that equation.

El Viejo's picture

Ok, let me get this straight:  The private sector is so far in debt that it is 90% of GDP(according to NPR) but they were starting to get out of debt, but now the govt is going to add insult to injury to the private sector(middle clss) by taxing them to economic death. Oh yeah what we've got here is a falure to communicate. Look out Japan here we come. Enjoy your money rich man (while you can)

Hedgetard55's picture

Don't worry, Obama is gonna tax the "millionaires, billionaires and corporate jet owners", the very same people who will be attending his birthday party/fundraiser!

Reptil's picture

run Forrest, run!

Panafrican Funktron Robot's picture

Anyone else think it's weird that we tax payroll?  Doesn't that specifically discourage hiring?  Isn't that the exact opposite of what we should be doing right now?  Wouldn't our net revs increase by simply encouraging more hiring by way of eliminating the payroll tax?   Is all of the preceding essentially rhetorical?

ElvisDog's picture

Payroll taxes pay for Social Security, Medicare, and Disability insurance. You eliminate payroll taxes, how we going to pay for those?

El Viejo's picture

Actually, I thought the payroll tax rebate was still in effect. The best idea he's really had while in office.

csmith's picture

Which is a bigger hit...the one we took in early April of this year when gasoline prices moved decisively above $3.00/gal? Or the one coming January 1 due to the payroll tax hike? Might not gas prices fall back and offset the entirety of the tax hike?

ConfederateH's picture

"this was the most progressive way to provide some relief. Those same individuals/families (average income of $37,000) will be hurt the hardest when the rates go back up."


Bruce the progressive, like Obama, can't admit the truth:  This is the only way to provide income tax cuts to the 50% that pay no income taxes.  Don't expect Bruce or Obama to try to communicate that this means that these people will still expect SS even though they are not contributing their "fair share".

FeralSerf's picture

Turnip's Law:

You can't squeeze blood out of a turnip.

akak's picture

And since when has failure to get that turnip blood ever stopped governments from squeezing, and squeezing more, and squeezing ever harder in the attempt to get that turnip blood?

FeralSerf's picture

It's their job.  That's all they know.

AGuy's picture

FWIW: The AMT was a much bigger hike than the 2% payroll. If I recall correctly the 2% is for the full 15.3% (last years Payroll tax), half of which is paid by the employee (7.6%) and the other half by the employer. So the net change for workers is only 1%. For many Middle class americans the AMT was probably 4% to 10% depending on deductions and income brackets.

Probably a bigger concern for the Middle Class is rising State, Local taxes, falling wages, and job loss. The economy continues to shed jobs, fewer hours and lower paying new jobs. For the past two years, the economy was pushed up by gov't stimulous spending that has dried up.

Ergo's picture

The whole thing is scary.  Income is down and taxes on individuals are going up (local taxes too).  Meanwhile, our government will borrow and print more, while big banks, defense contractors and multinationals gobble up whatever cash people have left.  And toss in whatever black swan is coming next, which we can't afford.  A perfect storm of chaos seems to be coming soon. 


Mercury's picture
If nothing else this shows why you can't take anything seriously the government says about spending or future promises/projections about spending.  This whole debt ceiling deal is almost entirely (way, way,way) back-end loaded and not exactly binding.  Most of the "wins" will vanish long before due date just like Obama's promised FICA cut extension.

BTW - Obama's "base" is more accurately defined as those voters and contributors (both high and low!) who receive direct transfer payments from the government. And no, he hasn't folded on them. This was a battle over discretionary spending not all the crap he's already had baked into the albatros pie for us.

Lmo Mutton's picture

Tax increase Bitchez!!

1100-TACTICAL-12's picture

But, when a long train of abuses and usurpations, pursuing invariably the same object, evinces a design to reduce [the people] under absolute despotism, it is their right, it is their duty, to throw off such government, and to provide new guards for their future security." --Thomas Jefferson: Declaration of Independence, 1776. ME 1:29, Papers 1:429

Shell Game's picture

"I hold it that a little rebellion now and then is a good thing, and as necessary in the political world as storms in the physical"  -T.J.


Oh, how long forgotten this line of thinking has become..

stormsailor's picture

i predict the biggest increase in tax fraud in history, hahahhaahahahahaahahahahah.

falak pema's picture

well when a state is bankrupt it has only one option : milk the sheeple. Growth is in the doldrums. Consumption is overbooked for twenty years. Investment is in speculation in financial derivatives area unrelated to real economy, ie : more of the same BS.  So you sound like Vincent Price in 'thriller'....hahahaha!

economessed's picture

When you add the reduction in average work week hours, the relentless drive for productivity gains, the sustained high price level of basic commodities, the ongoing decline in the value of the  housing stock, the perpetual increase in health care costs, and the devaluation of the dollar, YOU ALMOST FORGET THE 2% RISE IN FICA TAX.

We have plenty to worry about.

rlouis's picture

to tank in 2012 - sort of like going into hyperspace in Starwars, except they get hit by an asteroid wall first...

Yancey Ward's picture

We didn't take our medicine 3 years ago, but it can't be delayed forever.  Reality is catching up quickly, now.

Things that go bump's picture

We didn't take it after the bubble broke or after 09/11/2001 (remember baby bush telling us we should go shopping and not to worry our pretty little heads about things we didn't understand).  This medicine is going to be more like chemo.  We will all be spewing bodily fluids from every orifice and our hair will fall out before we die.  

alexwest's picture

kind of tired of reading Bruce blubbering lately..

I think this is an important development. It points to two things. The first is that we are economically vulnerable and we have no traditional responses. The second is that we are going to hit a very big economic wall on January 1, 2012.

As of the first of the year taxes on payrolls are going up by 2% across the board. This will suck $10b a month out of consumer’s pockets. I think it will prove to be a critical $10b.

pal, 2% FICA taxes reduction was activated on jan1 2011 ..
its been on for what , 1 year? how does it make any difference to get back to previous level?

Bruce, do you realise that currenly there'are about 100+ mnl private jobs and 45+ mln ADULTS on foodstamps..

who gives a fuck about salary taxes if THERE'S NO FUCKING jobs thus no fucking taxes..

who cares taxes are high or low , if nobody pays them ..

half nation dont pay federal income tax, but drives public roads, chidren go to public school, etc etc

ONLY CURRENTLY SHORT TERM SOLUTION IS KILL OIL SPECULATION AND MAAE OIL WORTH 40-50$. it will put 200-300 $ monthly into family pocket.. (hint, US oil imports are 10 year low, so prices should closer to 2000 level)

good luck

Bay Area Guy's picture

Couple things wrong with your post.  One, the expenses you talk about (roads and schools) are paid locally through all kinds of nuisance taxes, as well as property and gas taxes.  Two, as someone else pointed out, quite a bit of the increase in oil prices is because the value of the US dollar sucks.  My favorite example to use in this case is a barrel of Canadian oil that costs $100 in Canadian dollars.  One year ago, the US Dollar would get you about $1.04 Canadian, so that barrel of oil costs $96.15.  As of today, one US Dollar gets you $0.96 Canadian, so that same barrel of oil costs $104.17.  That's an 8+% increase in one year.  Did Canada get anything extra out of it?  Nope.  The only thing that changed was the crappy value of the US dollar.

Which leads me to my other pet peeve.  So many people are saying that the "evil speculators" are behind the increase in the price of oil.  Speculation is, in and of itself, not evil.  We all speculate every time we make any kind of investment decision.  If someone buys Apple stock, they are speculating the price will increase.  If someone shorts gold, they are speculating the price of gold will drop.  So, please spare me the diatribe about evil speculation.  Besides, for every transaction, there are two parties.

Now, I'm not naive enough to think that the oil market is completely above board.  If someone is manipulating the market, then, naturally, the full force of the Jedi Knights should come down.  But manipulation and speculation are two entirely different things.  So lay off the speculators and go after the manipulators.

markar's picture

Can you spell "currency devaluation" One of a few significant factors why oil will never be $50/barrel again.Truly one of the more idiotic proposals I've read here.

Hooter Shaker's picture

Public education is mostly funded by property taxes and road maintenance is mostly paid for with fuel taxes.

kaiserhoff's picture

Nice catch Bruce, but it will be a cold day in Calcutta before I think of Obummer as the Boss.

nod2glod's picture

off topic, so where does the slang to tank come from? searched on the interwebs and apparently something to do with tennis or boxing or drinking to much beer (tankard). just asking cause a non-english first language speaker asked me and i couldnt answer.