Fiscal Cliff Deal Cuts Average Workers' Paycheck By $1,000

Fiscal cliff deal cuts average workers' paycheck by $1000The tax package that Congress passed in the final hour of New Year's Day will protect 99 percent of Americans from an income tax increase, but almost every person will still see a hit to their paychecks.

That's because the legislation did nothing to prevent a reduction in the Social Security payroll tax from expiring. Social Security is financed by a 12.4 percent tax on wages, with employers paying half and workers paying the other half. That was reduced to 4.2 percent in 2011 and 2012, saving a typical family about $1,000 a year. In the deal, that tax break -- always intended as a temporary tax holiday -- was allowed to expire.

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Workers earning the national average salary of $41,000 will be $820 poorer next year, with the cut greater the higher the salary up to $113,700. But Mike Brey, who owns four Hobby Works outlets near Washington D.C., told CNNMoney that it was the lower-wage workers who would really feel the pain.

"These are the people who can least afford it," he said.

President Obama pushed hard to enact the payroll tax cut for 2011 and to extend it through 2012, arguing that it would put money immediately in workers' pockets, easing some of the hardship among middle and lower-income Americans, and helping the economy recover. Most economists agree that the cut provided valuable stimulus, but it was never fully embraced by either party, and this time around, there was general agreement to let it expire.

Only the wealthiest Americans will have to pay a higher federal income tax though.The package passed Tuesday by the Senate and House extends most the Bush-era tax cuts for individuals making less than $400,000 and married couples making less than $450,000.

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Americans above that threshold will see their income tax rate jump from 35 percent to 39.6 percent. High-earners will experience another tax bite this year because of Obamacare, which levies a new 3.8 percent tax on investment income for those making more than $200,000 a year and couples making more than $250,000.

"If you're rich, you're almost certain to get a big tax increase," said Roberton Williams, a senior fellow at the Tax Policy Center.

Many Republicans were deeply unhappy about the tax bump, and the negotiations exposed deep fractures in the Republican leadership. "It looked like they threatened to scuttle the whole thing," NBC's Chuck Todd said Wednesday about Republicans in Congress, "and they ended up helping Barack Obama raise taxes more than any Republican Party in a generation has helped anybody raise taxes, and they got nothing for it."

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Obama emphasized how the agreement protects the vast majority of Americans, who would have experienced a significant tax hike if all the Bush cuts had been allowed to lapse.

He said the deal "protects 98 percent of Americans and 97 percent of small business owners from a middle-class tax hike. While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country."

The income threshold covers more than 99 percent of all households, exceeding Obama's claim, according to the Tax Policy Center, and wealthier Americans will still enjoy the extended lower tax rate on the first $400,000 of their income.

"For most people, it's just the payroll tax," said Williams.

Claire Gordon contributed reporting.

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