Thoughts on the Obama Payroll Tax Cut, about to expire.

The Obama Payroll Tax Cut - the reduction in 2011 and 2012 of the employee share of FICA tax, commonly known as "Social Security Tax", from 6.2% to 4.2%, has left more cash in the hands of working Americans than any other tax cut in American history. That extra cash was spent Black Friday, in a significant increase in retail sales. More importantly, that extra cash has been spent throughout 2012, in a significant increase in automobile sales resulting in General Motors bringing back the third shift at Lordstown.

The Obama Payroll Tax Cut left an additional two percent of gross wages in the hands of employed Americans these past two years. This amounted to $600.00 per year for an employee earning $30,000.00 per year, and $2,200.00 in 2012 for an employee earning $110,000.00 or more for the year. It only amounted to $200.00 for a worker who only earned $10,000.00.

The Payroll Tax Cut expires December 31, 2012, along with the other Fiscal Cliff programs. On January 1, the employee share of FICA, formally the Federal Insurance Contributions Act tax, goes back to 6.2%. Some economists believe the 2% reduction in net paychecks will reduce demand for consumer goods and possibly result in job losses in industries dependent on consumer sales.

An alternative to the Payroll Tax Cut is a Payroll Tax Credit. Rather than the 2% rate reduction for all wages from zero to $110,000.00, which benefited some employees by $2,200.00 but only benefited others by $200.00, Congress might enact a Credit for the first $600.00 of employee share of FICA.

With a $600.00 Credit, NO employee share of FICA would be withheld from the first $9,677.42 of each employee's gross pay. Above that amount, the customary 6.2% would be withheld, as it had been prior to 2011. In this system, the employee earning $10,000.00 per year gets the same dollar amount of tax reduction as the employee earning $100,000.00 per year, or as the employee earning a million dollars per year for that matter.

The impact of the additional cash in the net paycheck would be different. The cash would be in employees' hands in January and February and March when, at least in the parts of the USA that still have Winter, additional cash is needed most. The financial beneficiaries of this policy are landlords and utility companies, for whom evictions and shutoffs might be reduced if more folks can pay their bills. For employees who are not at the desperate edge of eviction, additional cash in the winter months will likely go to consumer purchases which may retain employment for workers in industries which depend on consumer sales. And for the folks at the higher end of the pay scale, the extra six hundred bucks in January might result in better tips for workers in the travel and resort industries.

A Payroll Tax Credit that gets six hundred bucks into the hands of each employee, and gets the money to the worker in the winter when it is needed most, is better for economic recovery, not to mention better for some moral sense of fairness, than the two-percent-across-the-whole-pay-scale reduction that gave thousands of dollars to those who earned hundreds of thousands of dollars, and gave two hundred bucks to those who earned minimum wage.

Call your member of Congress. Say you want a fixed amount FICA tax credit for all employees rather than a rate change that gives more to those who already earn more.

- Christopher J. Mallin, Old Country Lawyer

(first published November 23, 2012, http://FiscalCliffNotes.us)

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