The prospect that tens of millions of American workers might see a much bigger tax bite come out of their employee payroll checks just six months from now has small business owners, large corporations, politicians, economists and just about everyone else in fear of massive disruptions in the U.S. economy. This looming scenario – dubbed “Taxmageddon” – has begun to get more play in the media lately, raising hopes that U.S. voters will pressure federal lawmakers to derail impending disaster.
Taxmageddon has been described as a “perfect storm” of tax code changes and budget cuts set to take effect automatically on January 1, 2013. If Congress doesn’t act or can’t reach an agreement on how to fix the situation, wage earners will see their take-home pay shrink while federal agencies are likely to lay off a significant number of employees.
Among the changes on the horizon that many people fear cumulatively will pile up into an economic train wreck:
- Tax cuts enacted under the George W. Bush administration will expire, raising tax rates on earnings, investment income, estates and gifts
- Employees’ share of the Social Security payroll tax will increase from 4.2 percent back up to 6.2 percent.
- The so-called “marriage penalty” for wedded couples filing jointly will reappear
- The child tax credit will be cut in half, from $1,000 per child to $500
- New Medicare taxes, part of the health-care legislation pushed by the Obama administration, will kick in, affecting high-income households
- Large across-the-board budget cuts will be applied to many federal programs and agencies
Economic data from Moody’s Analytics suggests that the combined effect of these changes, along with the end of the Obama-backed stimulus legislation known as the Recovery Act, would add up to a drag on economic growth amounting to 2.8 percent of the U.S. gross domestic product. Economists fear that such a drop in GDP has the potential to trigger another recession.
At roughly the same time that the tax and budget changes would automatically take effect, the national debt will once more be approaching its legal limit. This creates the opportunity for a Congressional deadlock over raising the debt limit similar to the one that occurred in July 2011. Polls show that Americans as a group hold Congress in very low esteem, and likely have little confidence in the legislative branch’s ability to easily reach a deal on any of these issues, let alone on so many of them at one time.
As if that weren’t enough, the deadline for coming to terms with Taxmageddon and the debt ceiling may be effectively shortened by two months because of the timing of the election cycle. Between the November 6 voting and the January tax and budget deadlines, a lame-duck Congress and possibly a lame-duck President will be sitting in Washington, which would make it extremely difficult for a deal to be worked out if the task is put off until November or December of this year.
When changes at the federal, state or local level affect payroll deductions, you can rely on the professionals at Padgett Payroll Services to help you stay in compliance with the law. Our specialty is providing accurate and timely payroll services for small businesses. Padgett offers affordable payroll administration and payroll management tools that use the latest digital and online technology. Call us now at (706) 548-1040 to get Padgett Payroll Services working for your company.
Do you have the support you need to manage your small business bookkeeping?
Schedule a 30-minute appointment to speak with a local small business adviser.