Will the Payroll Tax Cut Survive?

 

 

Could it? Should it? The Capitol Hill debate continues.

 

December 16, 2011

 

There is hope yet that this big tax break will return in 2012. While a pair of bills designed to extend the payroll tax holiday stalled in the Senate on December 1, a bipartisan effort could take place to save the tax cut that amounts to roughly $900 a year for the average U.S. household. It may not be taken for granted as much as the annual AMT patch, but it seems unlikely any Congress would want to be remembered for ending such a big tax break for Main Street in such a tepid economy.1


The big question: how to pay for it. Democratic leaders see a simple way to keep the payroll tax holiday going: they want a new tax on Americans who earn more than $1 million. Republicans didn’t exactly get behind that bill. They countered with their own version, which in the words of Senate Minority Leader Mitch McConnell (R-KY) would “institute a three-year pay freeze on federal civilian employees including members of Congress [and] reduce the federal workforce gradually by 10%.” That bill also went down to defeat.1


A follow-up question: should we keep paying for it? In 2011, the federal government reduced Social Security taxes by 2% on employee incomes of up to $108,600. The current payroll tax break is being subsidized by the Treasury. Is it wise to lower Social Security taxes when involuntary federal budget cuts loom in 2013 and credit rating agencies are monitoring our level of fiscal responsibility?2


Some Democrats want to reduce the payroll tax down to 3.1% for workers and businesses in 2012 (companies would pay only 3.1% in Social Security taxes on their first $5 million in payrolls). Sen. Sherrod Brown (D-OH) has a bill that would take that $5 million limit to $12.5 million for businesses that expanded their workforces. 2


The payroll tax holiday might turn out to be about as “temporary” as the Bush-era tax cuts, still alive 11½ years after passage (and not dead yet). The key to making the present 4.2% Social Security tax rate permanent? Finding a new and “permanent” method to pay for it that doesn’t risk siphoning dollars away from the Social Security Trust Fund.

 

What does this mean for you? If you are still working – a payroll tax cut that may continue. However, if this Social Security tax cut continues it will jeopardize the long term efficacy of the Social Security system.

 

If you are retired, there will be no immediate impact. However, every time the Social Security tax is cut for current wage earners, it jeopardizes the long term health of the Social Security system – a concern for all of us.

 

Once again, the payroll tax cut seems to be a short term fix for a shaky economy which “kicks the can” further down the road in terms of fixing the system. 

 

This is not a pleasant note during this Christmas season, but we want to keep you abreast of the important financial news. So in the meantime, let’s focus on the joys of the holiday season…

 

Merry Christmas and Happy Holidays!

 

Sincerely,
Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

P.S. As we prepared to send this out, there was word that Congress may pass a “2 month” extension to the payroll tax cut. Since approval on the full bill is doubtful, this would allow them to leave on Christmas recess. We can see where their priorities are.


Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

Citations.

www.marketinglibrary.net

1 - www.npr.org/2011/12/02/143052779/gop-leaders-lawmakers-at-odds-on-payroll-tax-cut [12/2/11]  

2 - www.cleveland.com/open/index.ssf/2011/12/will_your_payroll_tax_holiday.html [12/1/11] 

Another Payroll Tax ''Holiday'' - Not So Fast!
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Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
Doylestown, PA 18902
Phone: 215-340-5777
Fax: 215-340-5788
Email: Info@KohlheppAdvisors.com

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