Tuesday, December 20, 2011

The Politics of the Payroll Tax Cut

Before going on vacation the Senate passed a temporary bill that would extend the payroll tax relief, passed previously under the Bush tax cut plan, for the first two months in 2012. The bill passed with bi-partisan support while ignoring the House passed version that called for a yearlong payroll tax relief. Originally, President Obama wanted a yearlong payroll tax relief and is now pushing House Speaker Boehner to pass the Senate bill. Instead of complying with President Obama's request, the House never entertained the bill instead they put forth a resolution that the Senate identify members of their chamber for a conference committee to iron out the difference between the two bills. That being said, much is being blown out of portion on the payroll tax relief. President Obama and Democrats are saying that without passing the Senate Bill the average America will see their payrolls slashed by $1000.

Now, this $1000 does not come out in the first or second check one will receive in 2012; rather it is spread out over the entire year. What are being missed in this conversation are two things: that the payroll tax is actually what fuels SSN and Democrats railed against the extension of Bush tax cuts last year. The payroll tax is that line item known as FICA that adds money to SSN. During the past debt ceiling discussion the Democrats said that Republicans were looking to take away SSN benefits to seniors. By extending the payroll tax relief it is projected to underfund SSN by $250M. SSN is already set to be paying out more than it takes in with then next decade. Democrats are now arguing that the extra 2% reduction in payroll tax will help stimulate the economy but when the lame duck Congress was in place in 2010 Democrats voice opposition to extending the Bush tax cuts because it didn't result in stimulus of the economy.

If Congress is serious about ensuring more people have money in the pocket to spend and stimulate the economy they why not pass real tax reform. While I know that scrapping our tax format all together for a flat tax is not likely to take place why not alter all the tax brackets downward by the 2% and leave FICA alone. Even companies that deal with payroll acknowledge that instituting a two-month temporary fix will make a logistical nightmare and increase payroll expenses. How does that help or encourage a business owner to hire a new employee? I hope the Speaker Boehner sticks to his guns and demands that Congress agree to a permanent fix or at the minimum a one-year extension; something the President Obama wants anyway.