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Payroll Tax Showdown: What It Means to You

Steve Cole/Getty Images(WASHINGTON) -- Since a bipartisan bill to extend the payroll tax cut that passed the Senate on Saturday is expected to fail in the House Tuesday, lawmakers in Washington are gearing up for what could be a Christmas fight over how to avoid giving the average American a lousy gift for the New Year: a $1,000 tax hike.

While both parties have already agreed that the one-year cut should be extended, the political fight revolves around how to pay for the $112 billion tax cut, which went unfunded last year and which both parties have vowed will not add to the deficit this time around.

If the temporary holiday is allowed to expire, as it is set to do on Jan. 1, every worker would see their payroll taxes, which fund Social Security, increase by 2 percentage points to 6.2 percent, meaning Uncle Sam would take an extra $1,000 from a worker who earns $50,000 in 2012.

“If it doesn’t happen, every paycheck in the country will go down on Jan. 1,” said Chuck Marr, the director of federal tax policy at the Center for Budget and Policy Priorities. “It’s real money.  Every person you see every day has a thousand dollars less money.  That’s a lot of bucks.”

Because payroll taxes are only collected on the first $106,800 of income, cutting the rate has the greatest impact on low and middle income earners -- groups that tend to spend the largest proportion of their income.

“With the payroll tax cut, what is really at stake here is deciding whether or not to infuse $120 billion of disposable income into the economy in 2012,” said Andrew Fieldhouse, a federal budget policy analyst at the Economic Policy Institute.  “It’s not the best way to create jobs, but it is the biggest jobs measure being considered by Congress.”

Both Republicans and Democrats agree that raising taxes on middle and low income earners is a bad idea in the midst of an anemic economic recovery.  But the jury is still out on how big of an effect extending the current tax break will have on stimulating growth.

Republicans argue that the payroll tax cut shouldn't be funded with a tax increase that would be leveled at job creators, especially when the cut's stimulative effect is debatable. Democrats claim it is necessary to keep the economy growing.

Copyright 2011 ABC News Radio

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