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The implications of the payroll tax cut

The implications of the payroll tax cut

February 16, 2012  |  Share

A funny thing happened on the way to the payroll tax cut deal. The Republican leadership compromised. They decided to ignore the howls of obstructionists in their own party, like Michelle Bachmann and some in the Tea Party, because the tax cut, one of the only major tax cuts available to all Americans, is working. Why? Because giving Americans back money, by slashing taxes, is the way to stimulate the economy.  Extra dollars in their paychecks mean extra dollars being spent at local businesses. (Just a reminder, Moms, that is a Republican notion!) But as Ari Fleischer points out in today’s Wall Street Journal, Americans have to realize if the money is in their paychecks, it isn’t in their Social Security accounts.  Those payroll taxes go to fund things like Social Security.  And the deficit is now at 15 trillion dollars. And we cannot rob Peter to pay Paul. So the issue steps up the urgency of reforming Social Security.  I think the payroll tax cut got more complicated than it should have as both sides tried to tack on demands.  The Democrats wanted the wealthy to pay more in taxes to make up for the difference in lost Social Security funds.  But that doesn’t seem fair.  Why should one category of taxpayer pay for all of the other taxpayers’ social security benefits? Isn’t big business one of the reasons the economy is improving? Obama is getting credit for the recent uptick but let’s not forget the business community, last year’s big bad wolf in politics, that is doing the hiring. Shouldn’t they be getting credit for the improving unemployment numbers?  I would say the real winner  here is the reasonable Republican, who ignored the threat of those Tea Party-ers, some of whom were beginning to sound like they wished the economy were still doing badly because it would help them politically, to support this deal and move the economy forward as a team.  There is lots of good reading on this today. And I included a link from late last year with a White House wonky (is that a word?) who explains, using basic addition and subtraction, how the payroll tax cut works.

http://www.cnn.com/2012/02/14/politics/payroll-tax-negotiation/

http://www.washingtonpost.com/blogs/ezra-klein/post/wonkbook-for-white-house-compromise-through-confrontation/2012/02/16/gIQAYrySHR_blog.html?tid=pm_business_pop

White House wonky boils it down in simple terms.

http://online.wsj.com/article/SB10001424052970203413304577088584233162756.html

From Accounting Today:

The $150 billion agreement is partially offset by requiring federal employees to contribute another 1.5 percent of their salaries toward pensions, and by reducing the maximum unemployment extension from 99 to 73 weeks. However, Republicans dropped a key demand earlier this week that the full cost of the payroll tax cut extension be offset, while Democrats dropped their demand for a tax hike on those earning over $1 million to pay for it.

“The Republicans have pretty much signaled they want to move on,” said alliantgroup national managing director Dean Zerbe, a former senior counsel and tax counsel to the Senate Finance Committee. “I would expect that they’re going to get it done. The Republicans finally after a long time realized that they had a pretty losing hand, and that the Democrats would be more than delighted to spend weeks if not months talking about the issue, and offering up all sorts of amendments to have folks like Mr. Buffett pay for the $90 billion. And yet the Republicans had already drawn a line in the sand that they didn’t want to have any offsetting tax increases to pay for it. When you do that, you’re really setting yourself up for difficulty. It’s not easy to do even when you’re using taxes. You’re not going to get that kind of money just out of corporate jets.  I think if you look at the fiscal realities and the reality on the ground, you’re not going to be able to get there. It allows the Republicans to change the discussion and move on past this and talk about economic growth and the other things they want to talk about. I think they will get it done in the next few days. I was a little surprised that the Republicans moved so quickly after they seemed so intransigent a few days ago. It showed a certain presence of mind.”

President Obama, speaking at an event Wednesday in Milwaukee to promote tax breaks for companies that bring jobs back to the United States, praised the emerging deal.

“I’m glad to see that Congress seems to be on the way of making progress on extending the payroll tax cut so taxes don’t go up on all of you and 160 million working Americans,” he said.  “This tax cut means that the typical American family will see an extra $40 in every paycheck this year. And that’s going to help speed up this recovery. It will make a real difference in the lives of millions of people. And as soon as Congress sends me that extension of tax cuts and unemployment insurance to my desk, I will sign it right away.”


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