Over the last month there has been a lot of talk about the payroll tax cut and what it means. On Saturday, December 17, 2011, the U.S. Senate passed the tax cut for the next two months. So is this a good thing? Before we discuss the good and bad of this tax cut, let’s review its history.
The payroll tax cut was called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. It provides a two percentage point payroll tax cut for employees, reducing their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid. This equates to approximately $1,000 in savings for a household making $50,000 a year. In a bad economy, this is a big help for families.
The reasons why it was passed are simple to understand. First, who wants to raise taxes on the middle class in a bad economy? Two, since American spending is slow, reducing the paycheck will only slow the economy even more.
Yet, there is a reason why this was a fight. First, the tax cut costs the government $33 billion over ten years. Since our debt continues to climb over the $15 trillion mark and our economy is broke, an extra $33 billion cost is not what our government really needs. Second, the bill was not passed alone. Tied into it are an increase in jobless benefits, extending Medicare payments, and the pipeline.
The debate over the tax cut was never about whether or not we needed one but was more about how will we pay for it. The answers to that question are just beginning to come out. First thing we know is that mortgage fees are going to be going up to help pay for the tax cut, but even these won’t help quickly enough. The fact is, with this bill, Congress accomplished nothing except more spending and guaranteeing more future arguing.
The tax cut is only around for two months – what happens then? The reality is that, in two months, we will be hearing the same fight again. Companies are still unable to know what there payroll costs are. They will continue struggling to put together a budget. More so, the middle class has been screwed again. How do you plan your yearly budget on January 1st when you don’t know what taxes will do on March first? Can we spend freely or plan freely when Congress can change our take home pay at a moment’s notice? The answer is no.
Today, Congress went home for their Christmas vacation cheering their “victories.” The Democrats got a tax cut and the Republicans got their pipeline jobs. The American people are left in the dark wondering what will happen in two months — still unable to plan or to budget and held hostage by political games.
Anna Domzalski is a staff writer for the Financial Bin. Anna will soon begin her role as Dean of Financial Bin University and will conduct online budgeting classes beginning in February 2012. She can be reached via email at Anna@FinancialBin.com.