Monday, December 31, 2012

Soak the working folks

What no one is talking about in the discussions of the nauseating fiscal cliff negotiations is that the payroll tax holiday, a full 2 percent of individual incomes below about $110,000, is being let expire.  For most households with two parents working, this will be a full 2 percent reduction in take home pay.  Since consumption tends to track disposable income with a correlation >99 percent—combined with some reflexive belt tightening—this tax increase for the majority of households will almost certainly result in a slowing of the economy.  Meanwhile, as the floor for tax increases on the rich will be raised to approximately half a million dollars, the change in rates will likely have little effect.  As a commenter at Daily Kos points out, incomes at that level are largely driven by profits and capital gains and are highly variable, so that the increased tax rate will not even be perceived, at least for a long time.

Happy New Year, everybody!

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