Ask Dave: "What is the payroll tax holiday?"

There's a push in Washington, among the Republicans, to repeal the "payroll tax holiday" that Obama passed a year ago.  This is a subject that should be of concern to anyone making less than $106,800 per year, as it would effectively raise your income withholdings by 2% - in other words, you will get 2% less money in your paycheck if this "tax holiday" is repealed as the Republicans want.  However, there is a lot of spin coming from the Republican side to try and convince middle-class Americans who are directly and beneficially impacted by this tax holiday to once again vote against their own interests and support the Republican efforts to repeal this tax cut. 



So, what is the "Payroll Tax Holiday"?

Right now, employees pay a payroll tax, also known as FICA.  This amounts to 7.65% of your income every pay period for all income levels up to the first 106,800 that you make.  Out of this tax, 6.2% goes towards Social Security and 1.45% goes towards Medicare.  For all income earned above the $106,800 limit, you no longer pay the 6.2% towards Social Security, only the 1.45% towards Medicare.  The payroll tax holiday reduces the amount paid towards Social Security by 2%.  This results in a net savings of $2,136 for someone making the maximum amount of $106,800.  For an individual making the middle-class "average" of $50,000 a year, it provides a tax reduction of $1,000 annually.



What does all that mean?

Basically, everyone has to pay 6.2% of their income, up to the first $106,800 that they make, towards Social Security.  This tax holiday reduces that Social Security withholding by 2%.  For individuals making up to the $106,800 Social Security tax limit, it's a straight-across 2% tax cut.  For people making over $106,800, the percentage is reduced as it only applies to the Social Security withholding on the first $106,800.  Since they pay no Social Security taxes on all income above that level, there's nothing to reduce through the payroll tax holiday.  Thus, the more you make - over $106,800 - the smaller a percentage of your total income the payroll tax holiday returns.



So, does my employer have to pay the difference?

No.  The funding for all of the tax cuts and relief proposed by the Obama administration is under the umbrella of the "Make Work Pay" stimulus tax credit that was passed in 2010 under the American Recovery and Reinvestment Act, otherwise known as "Obama's Stimulus Bill".  Employers are not required to offset any tax credits or cuts given to employees.  The point of these stimulus incentives were to give relief to middle-class families hardest hit by the recession while also insuring that none of the burden was placed upon business owners.


So then why are Republicans against it?

The argument on the Republican side is that this tax holiday adds to the deficit and doesn't give businesses any real incentive to hire new employees.  They are using a vague, unspecific argument that extending this tax cut will somehow cause "uncertainty" with business owners regarding taxes, regulations and interest rates.  They assert that a short-term stimulus does nothing to help the economy and only results in creating more debt.


But, are they right?

I believe they are wrong.  However, if they are right, then that means they're definitely wrong.  I'll explain...

Congressman Paul Ryan, along with every other Republican in congress, supported former president Bush's stimulus check plan back in 2001.  They also supported his tax cuts.  Both of these things are attributed to eating away most of the budget surplus that Bush inherited from Clinton.  Back in 2001, congressman Ryan said this about the stimulus checks:

"I like my porridge hot. I think we ought to have this income tax cut fast, deeper, retroactive to January 1st, to make sure we get a good punch into the economy, juice the economy to make sure that we can avoid a hard landing.

The concern I have around here is that everybody is talking about let's wait and see, let's see if they materialize. Well, $1.5 trillion have already materialized in the surplus since then-Governor Bush proposed this tax cut in the first place. The economy has soured. The growth of the projections of the surpluses are higher. So we have waited and we do see, and it is my concern that if we keep waiting and seeing we won't give the economy the boost it needs right now."

 See, in 2001, congressman Ryan couldn't get enough tax relief out to the people fast enough.  He shrugged off the multi-trillion dollar price tag by mentioning the $1.5 trillion surplus they inherited from the Clinton administration.  Most importantly, however, he stressed the need to act immediately.  He warned that hesitating on passing these tax cuts and not handing out what ended up being a roughly $300 stimulus check to everyone would result in failing to boost the economy in the way that was desperately needed.

It's important to keep in mind that the economic downturn that the country was facing in 2001 was nothing compared to what we're dealing with now.  This was all done to address the relatively modest dip in the market following the attacks of Sept. 11th.  Back then, when the country was only in a downturn, nowhere near a recession, it was essential for Republicans to get as much tax relief out to the people as they could, no matter how small, in order to avoid a serious economic fallout.

Fast forward to today and congressman Ryan is now singing a completely different tune.  Now, in the face of a real and significant recession, congressman Ryan is saying that we shouldn't act quickly and pass short-term tax stimulus.  He claims that it will do nothing to boost the economy, that it will only create uncertainty in businesses and it adds to our deficit, which he is now strongly opposed to.  This is basically the exact opposite of what he said in 2001, when the exact same thing was being proposed.  The only difference between then and now is 1)  The economy is in much worse shape, and 2)  The idea is coming from a Democratic president instead of a Republican one.

So, either the Republicans are wrong in their opposition to extending this tax cut because they were right in 2001, or they were wrong in 2001 and their bad decision then has influenced another bad decision now and rather than admit they were wrong back when tax stimulus was their idea, they're going to lay it at the feet of the Democrats like they have done with every other bad policy decision they've made since the mid-terms. 

However, for Obama to be wrong - in the eyes of the Republicans - for seeking to extend his payroll tax holiday, the Republicans have to have been wrong when they passed the same kind of short-term tax stimulus back in 2001.  Since most economists agree that the 2001 stimulus did it's intended job of providing a short-term boost in consumer spending, which helped reverse the economic downturn following 9/11 and eventually led to the "irrational exuberance" in the markets, as former Fed chairman Alan Greenspan called it, then it could be said that the Republicans were right in 2001, and therefore they are wrong now.



That's a lot of words, Dave, break it down for me please!

Ok, here's the Dave Notes (not affiliated with Cliff Notes) version of the payroll tax holiday debate:

Obama wants to extend a 2% Social Security tax cut for all Americans.  This tax cut most benefits people making $106,800 a year or less.  The Republicans want to allow this tax holiday to expire, thus raising taxes for everyone making less than $106,800 a year by 2%.  The Republicans say that the reason they want to do this is because this tax cut doesn't really help anyone (except the people who get the tax cut of course) and that short-term tax cuts like this don't do anything to help the economy or boost consumer spending and only create more debt.  However, back in 2001, these same Republicans said the exact opposite when they were trying to pass tax cuts and stimulus spending under GW Bush.  So, they're hypocrites and the only reason they don't like these tax cuts now, when they used to like them 10 years ago, is because they're being proposed by a Democrat, not a Republican.


You look like you have something more to add?

I do!  It's also important to point out that Republicans are strongly opposed to Obama's proposal to raise taxes on the richest 2% of the country by about 2%.  They claim that a 2% tax increase on the wealthiest Americans will do nothing to help our economy or lower the debt and will only hurt spending, investment and job creation.  So, the same guys who say that we can't raise taxes on the rich by 2% under any circumstances are saying that we have to raise taxes on the middle-class by 2% or else we won't be able to generate the money we need to pay down the debt. It's totally contradictory and complete hypocrisy.



But wait, aren't there more middle-class people than there are rich people?  So wouldn't a 2% tax increase on the middle class generate more money than a 2% tax increase on the rich?

There are more middle-class people than there are rich, but that doesn't mean anything.  Here, I'll explain:

Right now, the 400 richest Americans have a higher total net worth than the poorest 50% of the country combined.  It has been widely accepted that a 2% tax increase on the richest 2% of the country would generate about $750 billion in revenue.  The bottom 50% of the country - all of whom are among those most affected by Obama's payroll tax holiday - have a combined net worth of about $1.3 trillion dollars.  In order to generate as much revenue from the bottom 50% of the country as you would with this 2% tax increase on the richest Americans, you would have to tax the poorest Americans over 50% of everything they own.  So, a 2% tax on the richest 2% of Americans will generate as much revenue as a 60% tax on the poorest 50% of the country.  Therefore, if you apply only a 2% tax to everyone making $106,800 a year or less, you wouldn't generate even a fraction of the revenue you would by raising taxes 2% on everyone making over $250,000 a year.



Ok then, so why are the Republicans in favor of raising taxes?  I thought they hated raising taxes?  I mean, isn't that why the Tea Party was formed in the first place?  To make sure our government didn't raise taxes?

I guess the only thing they hate more than raising taxes is Obama?