Cutting the payroll tax

Date posted: January 4, 2011

A part of the president’s new tax plan is a reduction in the payroll tax. N.C. State University economist Mike Walden explains this tax and the impact a reduction would have on the economy.

“We’re talking here … not about the income tax. I’ve heard some people confused on this issue. We’re not talking about the income tax. We’re not talking about income-tax withholding. Instead we are talking about what you see on your pay stub as FICA — Federal Insurance Contributions Act (FICA) that raises money for Social Security and for Medicare. And what the proposal is is to reduce the tax rate on the Social Security part. It would go down from around 6 percent for a worker — in other words, 6 percent of your gross pay is taken out for Social Security — down to 4 percent. And it would stay at that 4 percent for about a year.

“So this is a reduction in taxes; therefore, your take home pay would go up. It has nothing to do — absolutely nothing to do — with your income tax and your withholding. You don’t have to make that up later.

“What this would do, obviously, is put more money in people’s pockets, and administration economists hope that this means people go out and spend that money and help the economy.

“Now there is one long-run issue: I think most people know Social Security faces a long-run problem in funding. It will be paying out more money than it takes in somewhere around mid-century. So this is not going to help that; in fact, this is going to exacerbate that. So I think this is one of those policy issues where we say, ‘Well, we are going to get the short-run benefits right now, but it’s going to create some long-run issues for us down the road.’”

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