Payroll Tax Holiday Takes a Permanent Vacation
WASHINGTON – Wage earners have been surprised to rip open their first pay envelope of 2013 to discover their check provides less take-home money than anticipated – especially after being told the middle class was protected in the fiscal cliff agreement.
The reason is the big issue that both Democratic and Republican negotiators pointedly ignored during the seemingly endless balanced budget talks – the expiration of the two-year payroll tax holiday.
Beginning on Jan. 1 the payroll tax, also known as the Federal Insurance Contributions Act (FICA) tax, which is used to fund the Social Security system, jumped from 4.2 percent to 6.2 percent. Most of the estimated 160 million Americans who pay into the system will therefore see their anticipated income drop by 2 percent.
And there’s no reason to believe the money will be restored anytime soon. The reason, according to Donald Marron, director of the Washington-based Tax Policy Center, is simple – it “was always intended as a temporary tax cut to provide stimulus to the economy.”
As early as last February Treasury Secretary Tim Geithner indicated he would not recommend another extension of the cut that was first put into place in 2011.
“This has to be a temporary tax cut,” Geithner said in testimony before the Senate Budget Committee. “I don’t see any reason to consider supporting its extension.”
Heavy legislative hitters like House Democratic Leader Nancy Pelosi, of California, and Rep. Paul Ryan (R-Wis.), chairman of the House Budget Committee and his party’s 2012 candidate for vice president, likewise expressed a preference for letting it expire. Neither President Obama nor GOP presidential nominee Mitt Romney proposed an extension during the recently completed campaign.
The payroll tax holiday proved very expensive, reducing federal revenues by about $9 billion a month. While the Social Security system itself wasn’t affected – general revenues were used to compensate for the lost payroll tax monies — it had a harsh impact on a U.S. Treasury that was already rolling up deficits. The holiday cost was an estimated $103 billion in 2011 and $112 billion in 2012.
“It was viewed as a temporary holiday, put in place for one year and extended for another but never meant to be permanent,” said Sen. Rob Portman (R-Ohio), director of the Office of Management and Budget for more than a year under former President George W. Bush. “It didn’t create a problem for the Social Security system in the sense that we needed to put general revenues into Social Security because there were fewer payroll taxes going into the Social Security trust fund.
“It was one of these things that on a temporary basis it was appropriate but over time it makes it more difficult to increase the solvency of Social Security on its own, which is kind of the goal on both sides of the aisle,” Portman told PJM. “And then, finally, there’s just the overall deficit problem. Coming out of general revenues makes it more difficult to get that under control.”
Portman said he doesn’t anticipate any effort to reinstate the holiday.
The FICA tax assesses a 12.4 percent tax on earned wages up to $113,700. It is split evenly between worker and employer, each picking up half the tab, or 6.2 percent.
Under the Tax Relief Unemployment Insurance and Job Creation Act of 2010, the worker’s share was reduced to 4.2 percent in 2011 in an effort to provide a boost to a sluggish economy, the thought being that taxpayers would use the extra take-home pay to purchase goods, thus acting as a stimulus by circulating money through the system. That provision was then extended for an additional year.
In 2012, about 75 percent of the nation’s tax units brought home an additional $770 on average as a result of the payroll tax holiday. A study by the Tax Policy Center found that the 2 percent increase will have the greatest impact on lower- and middle-income taxpayers.
They needed a study to determine this? A simple run through a very basic mathematical equation would do. Of course it had the greatest impact on the working poor. Social Security is the most regressive tax of them all. Rick Perry was exactly right. The biggest Ponzi Scheme ever foisted on the low information voter and general flunkies of math.
As to the pain it causes the lower and middle income? Since they provided the greatest assistance to Barack Obama’s reelection, let the reality of zero information vote sink in someplace else besides the soundbite of their beloved MSM parroting – their wallet.
I believe I will ramp up my sympathy like Michelle Obama waxing on about the working poor at one of those $38,500 “invest in our future” lunches.
Golly, I kept wondering why they extended it another year… was that an election year or something?
While that’s certainly true, at the same time, this is what pays (in theory) for Social Security. It has to be funded by people who work, otherwise it won’t be funded.
Republicans are just as bad as Democrats – they want to spend, spend, spend, but don’t want to pay for it.
Social Security and Medicare are financed through the payroll tax. All that was accomplished was to shorten the time before both of these have to either cut benefits or start drawing on “general revenues” (perhaps a tax increase). If we were to eliminate all federal agencies that are duplicated by the states, there would be substantial savings that could be found. Additionally, we pay far more for health care than do people living in any other developed country. Our total health care costs are approaching $2.8 trillion dollars a year, or about 18% of GNP. The range for the rest of the developed world ranges from 9% (Japan)to about 13% (Switzerland) If we had the Swiss rate, we’d save $750 Billion dollars a year.
Uh, the FICA tax is not “split evenly between worker and employer.” It is paid 100% by the employee. Just because only the “employee contribution” shows up in the paystub doesn’t mean otherwise. The “split evenly” ploy is just to make the dummies think they are getting something for nothing. Kind of like the “free money” folks get back from the gov’t after filing their income tax return after having to much money withheld from their paycheck.
Exactly right. The same dupes who believe their employer pays a share also believe companies pay income taxes.
A corporate income tax is really just an indirect sales tax that companies collect from their customers on behalf of government.
Does that mean that employer paid required Healthcare is not just out of the business profits? Who would have thought that.
We are seeing what is happening when we tell a business with lots of $10/hr workers that they need to provide a benefit that costs $4 /hr. Further, right after that hit, the libs think the min wage should be upped a dollar or two.
As the owner knows he cannot raise his prices sufficiently to cover these new costs he goes to part time workers, and also automates as much as possible. Or buys his goods overseas as domestic manufacture got a bunch more expensive.
The new medical device tax, it seems that a big fact escapes most reporters, what is 1/2 the market for medical devices – those on medicare, they haven’t raised their reinbursement for years, do you really think the government will allow them to raise their prices by 3% to cover the 2.6% gross recepts tax – NO WAY. It’s out of your profits baby. Besides you didn’t donate to my campaign.
The payroll tax holiday should never have happened in the first place.
Payroll taxes are the way that SS is funded. Cutting those taxes just hastens the day when SS will go insolvent.
Any politician (of either political party) who bemoans the poor state of SS finances while simultaneously voting to give Americans an SS payroll tax cut is a hypocrite.
Sorry, Norquist. SS is one beast that cannot be starved, because its benefits are baked into the cake and have been for years.
Agree. This payroll tax “holiday” was as foolish an idea as I’ve ever seen out of Washington. If they wanted to “goose” the economy, they could have done it more directly and more effectively – by, say, eliminating some of those taxes we pay on our phone bills or on our airline tickets. (That would have the added benefit of simplifying the accounting burden on those industries.) But no, they played games with the Social Security system, making up the shortfall by drawing money directly from the Treasury (using borrowed money).
I agree also with rjh that this was an expensive (political) gimmick; shame on the Republicans for being complicit in this fraud.
Agreed.
The reduction of the so called, “payroll tax,” was just a political ploy to cater to the dumbed down segment of the populace at the expense of the providers. Leave it to the “takers” to lap up every piece of free stuff offered by a dishonest administration whose only purpose is the destruction of a free standing America.
It’s time to get back to sound fiscal practices…
The TEMPORARY payroll tax holiday was nothing more than a very expensive gimmick that the Republicans fell for (again). It was always intended to be used against the Republicans just as it has been.
Just opened my check, the 3% pay raise I got at the end of the year is gone… so my takehome is about the same. The government gets another $100 every two weeks from me to spend on …. whatever they spend money on these days.
Good times….
I don’t expect the 2% back. I just wish they’d call my social security “contribution” what it is – a tax.
It’s the height of hypocrisy that those who complain about the renewal of the FICA tax are the same people who are wont to say, “Don’t touch Social Security.” The SS system has been paying out more than it has been taking in for several years and the only way it has remained “solvent” is through the redemption of those “special bonds” that Congress instituted that allowed it to plunder the surplus funds paid into the system by the baby boomers. Those bonds are being redeemed by more borrowing, which is adding significantly to the deficit and debt. To anyone who seriously wants the SS system to remain viable, the holiday was a bad idea.
Yep, if this practice of stealing from Sam to pay Bob by borrowing from everyone occurred in the private sector, criminal charges might apply.
Yet our politicos having raiding this ‘n that for years with the stolen cache of cash deficits being passed on to those that follow.
An unsavory practice to say the least…
I read that President Roosevelt wouldn’t sign the Social Security bill without the provision to spend the cash on the New Deal. What did he replace the cash with? IOUs – Treasury bills, bonds, and notes.
I once worked and received compensation of $200/day as an employee.
A friend also worked for the same company and negotiated that he was independent employee, so he got the same $200/day but nothing taken out of his pay.
I wound up receiving more compensation because while I had social security deducted, my share, the employer matched it.
My friend wound up paying the full social security himself.
No free lunch.
The true original intent of the social security payroll holiday was to enable legislators in blue states to hike their respective income taxes (IL raised their’s from 3 to 5% days after the Soc Sec payroll tax holiday went into effect in January 2011) without the howl from workers you woke up to this morning. This was just Installment 1 in the Blue State Bailout. Soon to come is the High Speed Rail money being cashed in early to cover existing maintenance and less “futuristic” system expansion needs.
And so my fellow Americans (especially the low information, liberal Democrats)
elections do have consequences……dont they?
It is beyound me how they expect to fund SS and Medicare on the backs of the working class. Many think the payroll tax increase is no big deal…let me tell you how big a deal it is to me and my family. I am a divorced woman with one child who lives with his father. I pay a little over 20% of my pay in child support which amounts to about $500.00 dollars a month for one child…I also pay taxes each year…gross earnings are approximate 31,500.00 after taxes and the child support I bring home about 15,000.00 a year. I know I made a child and I have to be responsible for him…I have no issue with that! The tax has taken an additional $48.00 a month out of my already tight budget. I juggle money to pay bills and I am always behind on something (i.e I am one car payemt away from repoession)…I eat on about $100.00 a month… you can imagine what type of food I am eating and cannot afford health insurance so I am slowly dieing because I cannot afford to eat healhty or get medical care for any issues that arise from it…I cannot afford to buy basic necessaities like new Bras or underware…I cannot afford maintenace and up keep on my car…I literally cannot strecth another dollar out of my paycheck to help meet my needs…but our wonderful government expects me to not only pay for myself and my child which is fair…but it also expects I should pay for all of those on social security and medicare…while I believe that the retired and disabled should be taken care of…there has to be a better way to do it then to keep taking more and more money form those who cannopt afford to give it. I cannot find a second job or a better job and even if I did they would only up the amount I had to pay for Childsupport as well as take out more taxes so I cannot win…I have to work to take care of myself and my child and others…what really gets me is when I need help it is not available to me because I make to much money becasue these agencies out there go by your gross income (31,500.00) instead of what I actually have to live on…(15,000.00). I do not know how uch more I expected to pay…I am at the end of my rope here!!!! The way I live is a very sad…and know one cares!!!
It’s not that I don’t sympathize, Getting Poorer – unless you voted for Obama. I wish you no ill will and perhaps you are indeed a victim of circumstance – unless you voted for Obama.
What I am trying to tell you even if you did vote for Obama is your being squeezed everywhere – and not just Social Security. And people in your income bracket voted overwhelmingly for more nanny government at the expense of others.
That $48.00 extra you now pay? In fact, you’re were paying $48.00 plus interest. You were already paying it – you just don’t realize it. That money was made up out of the general revenue of borrowed funds. And that portion of the debt you incurred that you may not realize will accrue with interest for your child to pay.
Our tax structure is already incredibly progressive…
My guess is you are one of the many low-information Obama voters. You whine about what you have to pay to survive, telling us all how bad things are, via a computer and website. Typical. I also surmise that because your child lives with his father after a divorce, that something else is going on with you that you are not telling. Something bad. Let me tell you, I was in Tanzania and Rwanda this past October. I saw real poverty, not the kind in the US where you are “poor” if you have only a 42″ high-definition TV. You drive a car, you whine about the food you eat – you are not poor like they are in Africa. If you had educated yourself, you wouldn’t be in your situation. Moreover, if you had not voted Obama to assure yourself of more goodies, if you had voted for an American who cares about America, maybe you would have some hope. Real hope – not the fake hope and change that fools like you voted for.
“Ask not what your country can do for you. Ask what you can do for your country.”
What you can do is pay an extra 2% to pay for all of those government programs that YOU voted for.
“The FICA tax assesses a 12.4 percent tax on earned wages up to $113,700. It is split evenly between worker and employer, each picking up half the tab, or 6.2 percent.”
This statement, while technically true, is misleading. The 6.2% paid by the employer is part of the cost of hiring the employee and, in the absence of social security, could be paid directly to the worker.
It is astounding how many idiots paid no attention to the consistent coverage in the media about the 2% cut being temporary. Now they claim to be surprised that the payroll tax went back to its former (normal) rate?
But then, you have many people who seem to be surprised when they get their real estate tax bill from their city or county every year. “Gee, I didn’t know this was coming, and I sure didn’t plan for it!” As if they didn’t get a similar bill last year at about the same time, and the year before that, and the year before that, etc….
But I should have expected this bleating. When the Medicare tax of 1.45% first hit paychecks 30 years ago, despite all the publicity in the media about it, people I knew said then, “Gee, no one told me about this extra deduction. They didn’t ask us if we wanted to have this taken out…” As if there was a choice.
Lessons here: pay attention to news stories about taxes, benefits, and funding. And think about it all when you vote. But that seems to be a tall order these days…