Is a Tax Hike Baked in the Cake?
Conventional wisdom has it that Congress will avert a massive tax hike – at least for some – by extending the 2001 and 2003 tax laws during a lame duck session. Put aside for the moment that raising taxes for anyone is a bad idea. The conventional wisdom may be missing an important part of reality: the mechanics of payroll administration and withholding.
In normal circumstances, the Treasury Department send out next-year’s guidance on how much to take out of each employees paycheck in mid-November – roughly the time one would expect any lame duck session to begin. Until Congress acts, Treasury will have only one possible guidance to offer: plan on a tax increase. The table below – based on a Wall Street Journal article – shows how big the withholding shock could be:
|
Monthly Middle-Class Tax Increase |
||||
|
2011 Income |
No Children |
1 Child |
2 Children |
4 Children |
|
$40,000 |
$95 |
$135 |
$165 |
$215 |
|
$60,000 |
$95 |
$135 |
$180 |
$260 |
|
$80,000 |
$145 |
$150 |
$180 |
$260 |
|
$100,000 |
$270 |
$300 |
$335 |
$370 |
|
Assumes that all families claim the standard deduction; pay no alternative minimum tax for 2010 or 2011; and that child credit falls from $1,000 to $500 per child, with no other credits. Results are per-month tax increases, and actual withholding may vary. |
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These are big hits to the very middle class about which both sides agree there should be no tax increase. Of course, Treasury can delay providing guidance and firms can delay altering the withholding algorithms in their payroll systems. But the delay cannot last forever. A rule of thumb is that it takes 5 weeks to implement new withholding, time is of the essence.
Bottom Line: Congress has until the last week in November to avoid a damaging tax increase and a costly administrative snafu.
