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Obama's payroll tax cut: The best tax break you don't know about

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WASHINGTON -- President Obama is expected to ask Congress Thursday to extend the payroll tax cut every working person who gets a paycheck has been receiving for the past year. I call it the best tax break you don't know you have.

Why?

No one I've asked over the past few months can tell me the amount of cash Obama has put in their pocket. And it's clear the people I've been chatting with -- friend and foe of Obama -- had no idea they were getting a tax break. Maybe it's a result of so much direct deposit that people don't study pay stubs anymore or a matter of financial literacy or confusing messaging from the White House.

Here's the deal: Under a bipartisan deal Obama made with Congress in 2010 and starting in 2011, the deduction on your paycheck for Social Security -- often called a payroll tax -- was cut by 2 percent for a year. The rate workers kicked in dropped to 4.2 percent from 6.2 percent. The employers' contribution stayed the same -- 6.2 percent.

What does this mean to you? If you make $106,800 a year, the maximum saving is $2,136. (Social Security taxes are applied to only the first $106,800 of earnings.)

Let's look at it another way: If you make $500 a week, you get a $10 weekly tax cut. If you make $1,000 each week, your break is $20; a $1,500 weekly salary earner pays $30 less in payroll taxes.

In aggregate, the payroll tax cut pumped an estimated $112 billion into the economy -- indirectly.

This break works best if people buy stuff -- and not save the money or pay down debt. The Congressional Budget Office concluded that "higher spending would, in turn, increase production and employment."

Unlike other economic stimulus programs, the paroll tax break does not deliver as much bang for the buck as, say, a targeted tax cut or stimulus spending. Consider the upside: Trimming the payroll tax is one of the only tools around that can put money in the hands of consumers everywhere right away.

Obama, in his speech, may call for the employers' Social Security contribution to be temporarily trimmed. The thought is that even a short-term employer cut will bolster the balance sheets of business, potentially resulting in either more hires or expansion.

Some conservative Republicans in Congress question the effectiveness of the payroll tax cut -- even as they have fought hard to preserve the upper income Bush era income tax cuts.

The payroll tax holiday alone is not going to create the wholesale job growth needed to reduce the 9 percent unemployment rate. It is a retail component of a package of possible cures.

One of Obama's most caustic critics, Rep. Joe Walsh (R-Ill.), a leader of the anti-tax Tea Party may have, for once, found common ground with the president. Walsh told me he supports renewing the payroll break and extending it to employers. He does not believe it will create jobs but it "puts more money in the pockets of more Americans" and that is "always the right thing to do."

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Lynn Sweet

Lynn Sweet is a columnist and the Washington Bureau Chief for the Chicago Sun-Times.

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This page contains a single entry by Lynn Sweet published on September 8, 2011 7:07 AM.

President Obama official schedule and guidance, Sept. 8, 2011. Jobs speech before joint session of Congress was the previous entry in this blog.

Democratic National Committee fall meeting in Chicago Friday, Saturday. Illinois DNC chair Mike Madigan to surface at event is the next entry in this blog.

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