NCPA - National Center for Policy Analysis

Ready for Pay Cut?

November 1, 2010

If Congress fails to extend the Bush-era tax cuts due to expire December 31, Americans at just about every income level will see their taxes rise -- in some cases dramatically, says Investor's Business Daily (IBD).

It takes weeks for the Internal Revenue Service to prepare new withholding schedules.  Normally, the tables are issued in mid-November to give employers time to prepare.  But this year Congress left open the possibility it would do something about the expiring cuts, and employers have been left wondering what to do.

The impact could be significant.

  • Professor Michael Graetz of Columbia University recently estimated that letting the tax cuts expire will cost the U.S. economy $10 billion a month in added withholding from paychecks.
  • Goldman Sachs economist Alec Phillips estimates letting the Bush cuts expire could slash "nearly 10 percentage points" from disposable income growth in the first quarter of next year, and nearly two percentage points from gross domestic product (GDP) in the first half.
  • With GDP now a tad above $14 trillion, the impact could be $280 billion or more in the first six months alone.

What's most worrisome is what it will do to the working taxpayer.

  • A married couple without children and an annual income of $80,000 would have an added $221 taken from their paycheck every two weeks.
  • That jumps to $558 for couples bringing in $240,000.

Data from the Tax Policy Center show even those with modest family incomes would take a hit.

  • For example, a couple with income of $60,000 and four children can expect to pay $130 more every two weeks to Uncle Sam.
  • It doesn't get much better for those who make just $40,000 -- they'll find about $108 more withheld every other week.

This will have a serious impact on our struggling economy at a time when we can least afford it, says IBD.

Source: "Ready for Pay Cut?" Investor's Business Daily, October 27, 2010.

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