By Al Norman
I think Congress has it totally wrong on the issue of the Social Security payroll tax. The House and the Senate both passed bills extending the so-called “payroll tax holiday,” which was a misguided idea in the first place.
In 2010, workers paid 6.2 percent of their earnings as a Social Security tax, applied to earnings up to $106,800. That means a worker at the highest earning level paid $6,621.60 in Social Security payroll taxes. His or her employer paid in the same amount. A self-employed worker paid both halves — 12.4 percent of their earnings — up to the cap.
But for 2011, Congress gave us all a “holiday” by lowering our payroll tax to 4.2 percent. (Our employer’s share stayed at 6.2 percent). The self-employed worker paid 10.4 percent instead of 12.4 percent.
My theory is that very few workers even noticed the payroll tax break, and even fewer changed their buying habits because of it. Here’s why: A worker earning $45,000 would have paid $2,790 in Social Security payroll taxes in 2010, which fell to $1,890 in 2011 — a difference of $900. If that worker was paid every other week (26.1 pay periods per year) the change in his or her take home pay would have been $34.50 per pay period. A worker earning $30,000 would save $600 a year, or roughly $23 per pay period.
In a recent NPR story, a reporter asked people on the street if they had noticed their payroll tax cut. Most people said “No.” Most people didn’t even know what the payroll tax was — they thought their income taxes had been cut. Almost no one interviewed said that the change in payroll tax had stimulated him or her to shop more.
Yet warnings about the end of the payroll tax “holiday” made it sound like the rapture was coming. The International Franchise Association, which represents many fast food restaurants, told the media: “If Congress does not extend the payroll tax holiday, Americans will have less discretionary income, increasing an already high level of uncertainty amongst franchisees about sales and thereby hindering their ability to create new jobs.”
But this holiday from the Social Security tax is a foolish idea. For one, it lets off the rich entirely, because a millionaire with taxable wages only pays up to the cap on earnings, which affects only 10 percent of his or her income. Investors with mostly unearned income pay no Social Security tax at all.
Two: We are taking this money from the Social Security Trust Funds — and politicians have been squawking that Social Security is going bankrupt. This “holiday” is expensive. The bill passed by the House, which extended the payroll tax holiday until the end of 2012, reduced Trust Fund income by $180 billion. The Senate version, which extended the holiday only through the end of February, 2012, had a price tag of $33 billion. The expense here is because the holiday provides a little cut — but for 160 million workers.
Social Security can pay out all benefits through the year 2035 and 75-80 percent thereafter. This shortfall needs to be addressed at some point, but it doesn’t help to cut the Trust Funds on the theory that people will shop more. I don’t think people even noticed their payroll tax break, and if they did, they put what little extra they had into savings. The problem is: once you give people a “tax holiday,” when the holiday ends, people think they are getting a tax hike.
For me, this holiday was a bad idea that Congress should have killed — -along with the Bush era tax cuts for the rich.
Al Norman is the executive director of Mass Home Care. He can be reached at 413-773-5555 x 2295, or at info@masshomecare.org.
