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Time to say goodbye to the payroll tax cut? It's looking that way.

No matter how the 'fiscal cliff' talks end, federal taxes of working Americans appear likely to rise after Jan. 1. That's because the Obama White House isn't pushing to extend the payroll tax cut. 

US President Barack Obama signs a payroll tax cut extension in the Oval Office, in December 2011.

Kevin Lamarque/Reuters

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It now appears that all Americans with a job – no matter what their income level – will see their federal taxes rise on Jan. 1. That's because, in an effort to resolve the so-called "fiscal cliff," the Obama White House has quietly dropped its plan to extend the temporary 2 percentage point cut in payroll taxes, which are used to fund Social Security.

For someone who makes about $50,000 a year, the payroll tax will rise by about $19 a week, meaning that earner will have about $1,000 less to spend next year than in 2012. Some may make up for the lost income by eliminating that $4 latte every work day, or cutting back on the frequency of dining out at a sit-down restaurant.

“First paychecks [of the new year] will be about 2 percent smaller,” says Roberton Williams, a senior fellow at the Tax Policy Center in Washington. If someone's gross pay is $1,000 per week this year and all other taxes stay the same next year, that worker will take home $20 less a week in 2013.  

That may not sound like much money, but for the economy as a whole the payroll tax cut amounted to about $112 billion in 2012 – or the equivalent of at least $300 for each person in the US.

“It’s money taken out of the economy that is not available to be spent,” says Mr. Williams.

All those cups of coffee and dinners out have added up to some extra hiring. In 2012, the payroll tax cut was expected to boost gross domestic product by 0.5 percent and 400,000 jobs, according to an August analysis by Macroeconomic Advisers, a St. Louis firm.

The payroll tax cuts date back to 2010, when President Obama proposed – and Congress agreed – to cut payroll taxes for individuals for one year, in a bid to help the country recover from the Great Recession. So, in 2011, the payroll tax went from 6.2 percent to 4.2 percent on the employee’s contribution to Social Security for earned income up to $110,000. The employer contribution of 6.2 percent remained unchanged.


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