The fiscal cliff deal, otherwise known as the American Taxpayer Relief Act of 2012 (ATRA), debate that transpired this month between President Barack Obama and the Republican leadership generated a lot of media buzz regarding taxes and spending. The agreed deal will see an increase in taxes not just for the affluent but also everyone who maintains employment.
Negotiations led to a two percent increase in the payroll tax – a tax that funds Medicare and Social Security – to 6.2 percent on earned wages up to $113,700. For the past two years it has been at 4.2 percent when it was cut in an effort to stimulate the economy.
It is estimated by the Tax Policy Center (TPC) that the tax hike will cost about 160 million Americans workers on average $700, while a middle class family earning $50,000 each year will fork over an additional $1,000, a tremendous problem for millions of families across the country, who are heavily in debt, have a low savings rate and whose earnings remain stagnant.
By the end of 2013, it is expected that American workers will slash their savings and retirement in order to continue their standard of living. The TPC put forward a tax calculator for six different types of household situations and varying income levels at the 20th, 50th, 80th, 99th, and 99.9th percentiles.
A single person, 30, for instance, earning $50,000 will see $1,000 less in 2013. This means $1,000 will not be put towards retirement and could cost that individual a total of approximately $236,000 over a 36-year period.
Furthermore, TIME magazine reports that the increase in taxes will not only affect the savings but the national growth rate in 2013 as well. Economists project the tax hikes will cut 0.5 percent or 1.4 percent off of the GDP in the first quarter, while hurting any jobs recovery at the same time. A Merchant Forecast survey found that nearly one-third of store managers say shoppers are already cutting back on spending because of the two percent payroll tax increase.
Despite the rhetoric that only wealthy Americans will see a higher tax bill in 2013, most Americans will be slapped with even higher taxes, at a time when the economy remains sluggish, household debt levels stand at all-time records and people are not saving enough.
According to a LIMRA study published late last year, more than two-thirds of middle-income American workers are putting away less than five percent of their annual income for their retirement. The same survey also found that close to a quarter are hardly saving anything at all.
Other studies suggest the same numbers. Economic Collapse News reported this month that the youth in the United States are expected to maintain debt levels throughout their entire lives and even when they die.
Unfortunately, many Americans don’t seem to be bothered by their paucity of savings. According to a 2012 report by the Employee Benefit Research Institute, putting away money for retirement, an emergency or a rainy day remains a low priority for Americans in all age demographics, especially the youth.
Not only are the rich being squeezed with higher taxes and regulations, the poor and the middle class are slated to see less pay throughout 2013 on top of the inflation by the Federal Reserve and the rising cost of goods and services.
“Congress substituted a fiscal pothole for a fiscal cliff,” said Nick Perna, economic advisor to Webster Bank and financial lecturer at Yale University, in an interview with the New Britain Herald. “They extended unemployment benefits, but the payroll tax holiday is gone. The number one cause of economic uncertainty is Washington — whether you blame Congress or the president. People, in the abstract, want spending cuts as long as their own taxes are not increased.”
Early last year, House Budget Committee Chairman Paul Ryan harshly criticized Fed Chairman Ben Bernanke when he accused the central bank of eroding savings by “manipulating the yield curve and bailing people out by indirectly engaging in fiscal policy.”
Bernanke even admitted that he wants Americans to stop saving and start spending. This, according to many of his critics, including Peter Schiff, CEO of Euro Pacific Capital, is a hindrance to economic growth.