In the aftermath of the "fiscal cliff" settlement, much has been said and written about the detrimental effects of the increase in the payroll tax and too little about why the tax cut was allowed to expire. Too little has been said and written about the permanent reform to the Alternative Minimum Tax, long a significant burden to middle-class Americans.
The AMT, which was passed to prevent wealthy Americans from using tax breaks and loopholes to avoid paying taxes, was a good idea that evolved into a bad one. The failure to index it for inflation meant that many middle-class families that are far from wealthy found themselves subject to the tax. Congress has been passing annual "patches" without addressing the problem.
First District Congressman Richard Neal, a Springfield Democrat, has been pushing reform measures since 1998, and a perennially divided Congress finally approved a reform bill with the needed inflation indexes as part of the fiscal cliff legislation. Mr. Neal's diligence was rewarded and millions of American families, many in Massachusetts, some of whom earn $45,000 to $50,000 a year, will not be hit with a punishing and unfair tax.
The return of the payroll tax to 2010 levels will cost someone making $50,000 annually about $82 a month. The reduction, approved as an economic stimulus in the recession, was never meant to be permanent, however, and for Democrats and Republicans who agree on little to allow the cut to expire indicates there is sound logic behind their inaction. Economically, it made sense for the long haul.
The payroll tax funds Social Security, and many of the pundits complaining about the hit to paychecks because the reduction expired have undoubtedly been complaining that the Social Security trust fund will run dry without additional revenue. That money has to come from somewhere. Social Security (which, by the way, is not an "entitlement" because it was earned by Americans through hard work and taxes paid on wages earned) is an investment in the future, and the payroll tax is an investment in Social Security. That's the neglected second half of the expiration of the payroll tax reduction story.