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Friday, August 5, 2011

Payroll tax cut should expire as intended - we need to stop the tax cut addiction

In an August 5, 2011 speech, President Obama stated:

"when Congress gets back in September, I want to move quickly on things that will help the economy create jobs right now –- extending the payroll tax credit to put $1,000 in the pocket of the average worker, extending unemployment insurance to help people get back on their feet, putting construction workers back to work rebuilding America. Those are all steps that we can take right now that will make a difference. And there’s no contradiction between us taking some steps to put people to work right now and getting our long-term fiscal house in order. In fact, the more we grow, the easier it will be to reduce our deficits."

There is also a story on this in the August 6 Wall Street Journal - "White House Renews Push to Extend Payroll-Tax Cut" (Peterson).

The payroll cut is in effect just for 2011 and is for employees. It reduces the employee's Social Security tax to 4.2% rather than 6.2%, but leaves the employer rate at 6.2%. Self-employed individuals get a similar break on their self-employment tax. The Wall Street Journal article notes that extending this cut will cost $112 billion.

Here are three concerns I have with the cut in 2011 and for extending it to 2012.

1. This reduction was intended to get more money in workers' hands so they would spend it and stimulate the economy. I have yet to find anyone who knows they got the cut. People are surprised when I mention it to them. Will a cut have much effect if people don't know their paychecks have a few extra dollars in them to spend? Of course, this is not just a few extra dollars. For individuals at the Social Security wage cap of $106,800, it is $2,136!

Where is the value in giving people up to a $2,136 tax cut if they don't know about it (certainly, doesn't seem to be much political value). The common response I get from people when I tell them about this cut is - Why would President Obama and Congress do this when we have such a large deficit? Great question!

2. How does reduced Social Security taxes for employees (not employers), with the Social Security funds backfilled from the General Fund to make up the difference, create jobs? I don't get that. I hope this is not because employers are to pay their employees less because of the cut - that seems odd.

3. Tax policy - what is the tax policy behind the reduced Social Security tax for employees and self-employed individuals? For one thing, this is not transparent. Most people don't know about the cut. Also, since the SS fund is being reimbursed by the General Fund, seems like a convoluted way to get a tax cut and fund Social Security.

I think part of the president's call for extending the tax cut is because politicians today just seem to love tax cuts and seem to forget that we can't afford them. This is one that should end on 12/31/11 as called for in the 2010 legislation that created it.

What do you think?


Anonymous said...

People may not be aware of the effect or the presence of the last payroll tax cut, but I would argue that knowledge only matters politically. If we accept that indeed, money was transferred (I believe an average of $1000 per household), the reason behind it is irrelevant so long as the money was spent.

Professor Nellen said...

Thanks for the comment. I agree that the knowledge is important politically, but for anyone calling for a tax cut who doesn't know about the existing one, the knowledge would help. We should also be asking whether a tax cut is truly needed and was it for the right group of taxpayers (here, all workers and self-employed individuals).

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