One of the taxes that we pay is called a “payroll tax”. This is a tax that goes to the federal government, funding programs like social security. The payroll tax has recently been 6.2%. However, the stimulus bill spearheaded by President Obama allowed for a one year “holiday” on the payroll tax. It brought the rate down to 4.2%. This means that for the past year on average people have gotten an extra $50 in their monthly paychecks. That totals about $1,000 for the entire year.
Who Does the Tax Cut Apply To?
The tax cut is applied on the first $106,000 of personal income. Thus, it’s been applied to 160 million Americans. People making more than $106,000 haven’t gotten the tax cut.
Did the tax cuts stimulate spending in 2011?
Economists disagree. There are some economists that believe that the tax cut stimulated spending, especially for those who live paycheck to paycheck. This is one of the reasons that there is bipartisan support for renewing the payroll tax cut.
The reason it hasn’t already been renewed is because Republicans and Democrats disagree on how to pay for it. The total cost of the payroll tax cut is around $200 billion. Republicans don’t want to raise taxes on millionaires to pay for it. They argue that there are too many small businesses (“job creators”) who would be hurt by this. Democrats would like to tax millionaires by approximately 2% and would like to roll back some tax breaks for oil companies.
The deadline for renewing the payroll tax comes by the end of the calendar year. This is also when certain unemployment benefits will expire. It’ll be interesting!
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The Takeaway: There are rarely easy solutions in policy matters. Personally, I think both the payroll tax and unemployment benefits should be extended. Congress should focus on revamping the tax code to extract more revenue.
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