Should the Payroll Tax Cut Be Extended?

Thursday, August 18, 2011 Print Email

President Obama has been pushing to extend the 2-percentage-point cut in the payroll tax through next year, but this is one tax cut that his opponents in Congress may not agree to allow.

The tax cut was part of the deal that Obama negotiated with Republicans last December to extend the Bush-era tax rates. It reduced for one year the Social Security payroll taxes withheld from employee paychecks from 6.2 percent to 4.2 percent. Employees could save up to $2,136 on taxes by the end of the year, according to The Wall Street Journal. That put more spending money in their pockets that they could use to buy things and hopefully boost the economy. However, the tax cut was also projected to cost the Treasury about $112 billion.

Still, Obama is pushing to extend the program in an effort to keep the economic recovery from stalling. He wants Congress to pass an extension of the payroll tax cut, along with an extension of unemployment benefits, when they return from recess next month. Like the payroll tax cut, the money from unemployment benefits is typically spent quickly by the people who receive it.

“We should extend the payroll tax cut as soon as possible, so that workers have more money in their paychecks next year and businesses have more customers next year,” Obama said on Monday, according to The Hill.

Republicans are typically in favor of tax cuts, but this year they may want to use the payroll tax cut as leverage in the bargaining over the debt ceiling that will take place this fall among the 12 members of the newly appointed “super committee.” Republicans instead favor lowering the top tax rates for businesses and individuals from 35 to 25 percent, under the plan advanced by House Budget Committee Chairman Paul Ryan, R-Wisc., and approved by the House. The idea of a corporate repatriation tax holiday for bringing profits back to the U.S. from foreign subsidiaries at reduced tax rates has also been gaining adherents.

Critics of the payroll tax cut point out that it hurts the funding base for Social Security, which will need all the money it can get as increasing numbers of Baby Boomers reach their retirement years. It certainly isn’t a tax cut that can be extended on a regular basis every year if the Social Security trust fund is going to remain solvent.

In any case, an extension of the payroll tax cut may become part of the larger debate over tax reform in Washington. That’s a debate that’s been going on for a long time now with no end in sight. But with the Making Work Pay Tax Credit gone now, and its successor approaching its expiration date in a few months, taxpayers may soon find a little chunk of their paychecks missing in January.

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