Well-to-do fare better under fiscal cliff bill than middle class

In addition to the long list of tax breaks and "tax extenders" in the fiscal cliff bill, here's something the president and Congress neglected to tell American taxpayers:
Middle class workers will see more of a tax increase than those earning between $200,000 and $500,000.

How can that be?

Well the middle class got hit with the higher payroll tax, the 2-percentage-point boost back to 2010 levels, while those in the $200,000 to $500,000 crowd were not affected. They stop paying the payroll tax once they hit the ceiling -- currently just above $100,000.
According to the nonpartisan Tax Policy Center, the result is that the so-called effective tax rates -- the percentage paid after exemptions and deductions -- actually rose slightly more on Jan. 1 for those in the middle income brackets than for the well-to-do (see chart).

Here's how the labor-backed Economic Policy Institute explains it:

"While the "fiscal cliff" budget deal included provisions that increased taxes on high-income households, it failed to extend the payroll tax cut, a 2-percentage-point tax cut on wage and salary income that went into effect in 2011. This cut—which replaced the better-targeted Making Work Pay tax credit—was subsequently extended through 2012. Congress’ failure to extend it further in the cliff deal causes a high tax increase on middle-class households.

"According to the Tax Policy Center, this tax increase (as measured by impact on effective tax rates) is roughly equal to the tax increase on households with cash income between $500,000 and $1 million. Worse yet, it exceeds the relative tax increase on households earning between $200,000 and $500,000."

 

You can view a larger version of this graph here.