WASHINGTON -- Americans face a broad increase in taxes today for the first time in at least two decades, ending a prolonged period of declining taxation that has become a defining characteristic of the U.S. economy.
Despite the emerging agreement to avoid much of the so-called fiscal cliff, many Americans will see a higher tax bill because of the expiration of the payroll tax cut, which was enacted in 2011 as a temporary measure to boost economic growth. The tax holiday was preceded by a similar temporary cut in 2009 and 2010.
The deal apparently reached late Monday by Vice President Joe Biden and Senate Republican leader Mitch McConnell of Kentucky would address a separate tax -- the income tax -- and prevent tax rates from increasing for all but the wealthiest Americans. But both sides have decided to leave the payroll tax out of the agreement.
Unlike income taxes, which rise along with a worker's income, the payroll tax is a fixed percentage of an employee's salary. Allowing the tax cut to expire increases taxes on salaries by 2 percent for every American worker. Up to $110,100 a year in salary is subject to the tax.
This jump in payroll taxes, combined with other tax increases affecting the very wealthy likely to take effect as a result of the emerging deal, makes for the largest increase in taxes in about half a century.
With the country going over the fiscal cliff for at least a day because Congress did not approve the deal before the year-end deadline, a wide range of taxes go up Tuesday, though perhaps only for a matter of hours. If lawmakers ultimately fail to finalize the emerging agreement, it would mean thousands of dollars would come out of the pockets of average workers, the largest tax increase on Americans since World War II.
But more likely is a deal that extends lower tax rates for families earning under $450,000. At the same time, higher-income earners would face steeper income taxes and potentially fewer tax breaks, as well as an already enacted new tax to pay for the Affordable Care Act health care legislation.
For most American workers, the expiration of the payroll tax cut would be the only increase they experience.
With the end of the payroll tax holiday, a worker earning $50,000, for instance, will pay $1,000 more in taxes this year; a worker earning less than $20,000 a year will pay about $100 more. Someone in the upper fifth of households, making $150,000 a year, will pay about $2,200 more.
The increase in taxes on workers means that "the era of asymmetrical tax policy -- where taxes can only go down -- is over," said Jared Bernstein, a former White House economic adviser. "What's been weird is in this history of taxation in America, there's been this long period when it's been forbidden to increase taxes at all."
While the Obama administration fought for the payroll tax cut in previous years to stimulate a weak economic recovery, the White House has been more ambivalent this year. Before the election, even as prominent Democratic economists and lawmakers argued in favor of extending the tax cut, the White House declined to call for its renewal.
Then, during its post-election talks with congressional Republicans, the Obama administration requested an extension. But Republican lawmakers were skeptical, viewing the payroll tax holiday as contributing to federal deficits because the Treasury had borrowed money to replace payroll tax revenue. The administration quickly dropped the payroll tax cut from negotiations.
The tax increases come after a period of tax cutting that began in 1997. That year, President Bill Clinton trimmed rates on investment income. President George W. Bush cut a wide range of taxes in six of his eight years in office.
President Barack Obama continued the trend, cutting taxes in 2009 and then even more deeply in 2011, largely in response to the deep recession.
As a result, nearly half of American workers likely have never experienced a tax increase.
Economists say the expiry of the tax cut will be a major drag on the economy this year. Estimates suggest it could cost between 500,000 and 1 million jobs, leaving the unemployment about 0.4 percentage points higher than it otherwise would be.
Tax increases on the wealthy, by contrast, are expected to have much less of an effect on the economy.