Payroll Tax Holiday Extension Contained A Big, Fat Tax Hike
The pre-Christmas debate over extending Obama’s payroll tax holiday seemed to set the usual tax debate on its head. We had liberals arguing to lower taxes to stimulate the economy being opposed by Republicans who noted that the tax holiday would deny funds to behemoth social programs.
But there was an element of the debate a lot of people missed. According to this bulletin from the IRS, the legislation extending the payroll tax holiday had a new provision in it for a tax hike on some Americans:
Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).
This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.
This would apply to people who make over $110,100 per year (assuming their two-month income is uniform throughout the year), and it apparently only applies to this two month window of income.
So, in addition to the ephemeral nature of this tax holiday, we now have more complication from an additional tax for some income earners on two months of their income.
This was bad policy when Obama first proposed it, and its bad policy now that it’s a complicated mess. We’d have been better off not passing it.
Tags: payroll taxes
