Before the end of the year, Congress will be voting on whether the current payroll tax holiday will be extended into 2012 or it will be allowed to expire at the end of 2011. Without an extension, taxes for the average American family would be approximately $1,000 higher next year.
Update 12/24/11 – The House and Senate Finally Agree on a Short-Term Solution
The House and Senate have approved and President Obama has signed a short-term extension of the payroll tax holiday. American workers will continue to pay just 4.2% on their wages inso Social Security until February 29, 2011. The new law also extends unemployment benefits. Lawmakers will return in January to start discussing an extension for the remainder of 2012.
Update 12/10/11: Republicans Propose New Plan to Extend Payroll Tax Cut
In the continuing debate regarding the payroll tax holiday, on Friday Republicans proposed a new plan extending the payroll tax cut and unemployment benefits for the long-term unemployed. However Democrats argue that the trimmed unemployment benefits are too stingy and the President is likely to veto the language regarding a controversial oil pipeline. While both parties agree that the payroll tax holiday and unemployment benefits should be extended, they can’t agree on the details. At this rate, it’s unclear whether a bill will be passed before year-end or not…
Update: Democrats Propose Scaled Back Version of Tax Holiday
Earlier today, Democrats proposed a plan that would allow the tax holiday to continue into 2012, but at the expense of higher earners. The plan calls for a surcharge on Americans who earn more than $1 million per year, in an effort to pay for the tax holiday being extended for lower and middle income Americans. The idea is to allow the payroll tax cut to continue without depleting the Social Security fund. This is expected to be voted on later this week.
Update: Republicans Introduce an Opt-In Plan
A House Republican introduced a proposal that would allow taxpayers to choose whether they would receive the Social Security tax break of 2% or not. Those who took the tax break would have to wait an additional month to reach Social Security retirement age, which is supposedly equal to the decrease in taxes they would contribute as a result of opting in to the tax holiday.
What is the Payroll Tax Holiday?
As a worker, you are aware that you have taxes withheld from your paycheck. A portion of those taxes are for federal, state and local income taxes (depending on where you live, you may not have all of these), but a large portion of your tax withholding is for Social Security and Medicare, also called FICA. FICA taxes are paid by both employees and employers. In 2010, the amount was 6.2% for Social Security (on income up to $106,800) and 1.45% for Medicare, for a total of 7.65% each.
At the end of 2010, the amount of Social Security tax for 2011 was reduced 2% to 4.2% for employees only. No changes were made to Medicare or to federal, state or local income taxes.
This 2% payroll tax reduction was created to help boost the economy and was intended to be for 2011 only. However, since the economy has grown slower than expected in 2011, President Obama is calling for the tax cut to be extended into 2012.
How Extending the Tax Holiday Will Help the Economy:
Allowing the tax holiday to expire would basically mean a 2% tax increase for Americans. This could cause an already weak economy to slow down even more. According to the Washington Post, “Economists believe that extending the tax holiday could help stimulate the still-ailing economy by leaving more cash in the hands of consumers.”
Why Opponents Believe Extending the Tax Cut Could Cause More Harm Than Good:
President Obama has proposed that not only should the payroll tax holiday be extended, but that the rate should be cut in half (from 6.2 to 3.1 percent); the President also suggested cutting payroll taxes for employers.
Those opposed to Obama’s plan believe that the wealthiest Americans would benefit the most from this plan, and that they would not be likely to spend any tax savings, therefore therefore the benefit to the economy would be negligible.
Opponents also worry that allowing the reduced Social Security rate to continue would cause the Social Security fund to run out of money sooner than expected. Republicans would prefer to see other tax cuts in place of the temporary tax holiday that would not involve reducing Social Security taxes.
Prediction: The Payroll Tax Holiday will Prevail, at least for a While
Given that next year is an election year, it’s unlikely that President Obama or Congress would allow the tax holiday to expire. This would be the same as passing a tax increase, and would be political suicide in our current economic and political environment. Expect the tax cut – or a similar version – to continue in 2012.
What do You Think? Should the Payroll Tax Holiday be Extended or Should Congress Allow it to Expire?
With less than a month left in 2011, taxes are a top priority in Congress. Supporters of the tax holiday say that without an extension, the increase in taxes will cause our already slow economy to falter even more, possibly back into recession. On the other hand, opponents argue that continuing the tax holiday will bankrupt Social Security even faster. Given how close we are to the next presidential election, it is expected that at least some form of the current payroll tax holiday will continue into 2012.
What are your thoughts? Should the payroll tax holiday be extended or should Congress allow it to expire at the end of 2011?
For more articles on the payroll tax holiday, and to see what else is happening in taxes, please visit Tax Carnival #94 at Don’t Mess With Taxes.