The Social Security Tax Cut And A More Direct Route To Job Growth

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Category: Federal Law & Legal System, Tax Law
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The first pay day of 2011 is fast approaching and just about everyone is going to see an increase in the amount of their take home pay.  The amount of the change depends on how much money a person makes, but there will be a change that stems from the December passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act).

With the passage of the Act, the Republicans claimed victory by extending most of the “Bush Tax Cuts” for another two years.  This move was necessary to avoid an increase in the amount of tax most employees would pay each week.  To achieve a reduction in the amount paid the legislation includes a temporary two-percentage-point reduction in the employee’s share of Social Security Tax.  This reduction replaces the now expired Making Work Pay tax credit, but is slightly more expansive and will put a little more money in the pockets of the taxpaying public.

The FICA tax (consisting of Social Security and Medicare taxes) is imposed on both employers and employees at an aggregate rate of 15.3 percent.   Half is paid by the employer and half is paid (through withholding) by the employee.  That is, each employer and employee pay 7.65 percent in FICA tax. Of each half, 6.4 percent is Social Security Tax.

In 2011, the Social Security tax is imposed on the first $106,800 earned by an employee.  For this year only, the Act reduces the employee’s share of the Social Security Tax to 4.4 percent of this wage base.  This means that an employee making $106,800 will pay $2,136 less in Social Security Tax in 2011.  An employee making $50,000 will pay $1,000 less.

Conceptually, the taxpaying public will be able to spend these extra dollars to stimulate the economy and hopefully promote job growth.  However, there could easily have been a more direct route to job growth.

While it would have been unpopular, the recent Tax Act could have given the Social Security Tax cut to employers rather than employees.  If the employer’s share of the Social Security Tax had been cut by two percentage points, for a $50,000 employee, the employer would have saved $1,000.  Thus, the direct cost of employing that individual would decrease.  For ten such employees, the employer would save $10,000.  If the employer has 50 employees, it has just saved enough to hire another $50,000 employee.

If these savings are scaled up to some of our nation’s larger employers, we are talking about a lot of available positions.  By crafting the savings as a credit only available on the hire of new employees, such legislation could have directly promoted employment and protected the savings from being distributed shareholders or retained by an employer.

Above, however, I said that such a move would have been unpopular.  Frankly, it would have been impossible to achieve.  The politics of Washington would have cast the move as a tax cut for big business and the rich, rather than a job growth strategy.  Sound bites would have triumphed over sound reasoning.  Instead, we have to forgo the direct route to job creation and hope that the indirect route works out.  That is, if we all spend enough, businesses will have more money, increase production and hopefully will hire more employees.

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6 Responses to “The Social Security Tax Cut And A More Direct Route To Job Growth”

  1. Gerald Willett Says:

    The rate is 6.2% and the new rate is 4.2%. I think this raid on Social Security is a deplorable idea. We are cutting Social Security revenue by 16 1/8% for the year at least and if anyone tries to just allow this temporary measure to expire, they will be accused of raising taxes; excellent plan by those that want to completely dismantle Social Security.

    Everyone receiving this money better not spend it. You have just traded a piece of your retirement for money now. You need to invest it intelligently in your retirement. But if you were already doing that, you are out of luck because the maximums for retirement accounts are frozen at the 2009 level. So now you have 2% taken out of Social Security and no place to put it for your retirement.

    Saving it in retirement accounts might help the economy if you are able to invest intelligently. But even then, it might end up just being held hostage by the banks or it might end up disappearing into the next scheme that appears to be legitimate until it falls apart and takes all your money with it.

    Giving the 2% cut to the corporations would be even worse. Business will not spend this money on hiring. Hiring employees is a long term commitment. A 2% temporary decease in benefit cost will not be rolled into hiring new employees. (I know I said it was not temporary above but intelligent people running business accounts will not count on that.) At best, the money might go to hire temp workers. More likely the worst would occur and it would just turn into profit then maybe some will trickle down to the masses. Okay, to be fair corporations might use some of the money to invest in the future of the business but I really doubt that is employees. And part of it would just turn into profits. Maybe the capital investments could stimulate the economy.

    But your argument that they could go hire another $50,000 employee is not really believable.

  2. Gerald, I concede to the percentages. It is 6.2% and 4.2% rather than 6.4% and 4.4%. That was an error.

    The Internal Revenue Code is used to create incentives for certain types of behavior (i.e.. home ownership, charitable giving). If such an employer social security tax cut would be structured as a credit available only on proof of the hire of a long-term employee (i.e., over 12 months) would this change your opinion on its viability?

  3. Stephen Bosch Says:

    Gerald,

    I completely agree with your reasoning.
    Unfortunately, that idea only applies to — as you stated already — smart people. Given the fact our educational rate is deplorable, our literacy rate is to be ashamed of, and our average Joe Schmo is more interested in pick up trucks and the right to bear arms, I am afraid this extra $1,000 freed up will indeed be spent and plunged back into economy. Whether that will indeed amount to recovery of said economy, and initiate a job growth is highly unlikely.

  4. Unfortunately, giving the tax credit to an employer does not guarantee a hire unless the demand for an employer’s products, services, etc. increases.

  5. I think it’s so funny that people think just because a company is saving money, i.e., taxes, that they will automatically increase production and hire more people. If customers are not spending money, why increase production or hire new people??? Just because?? Come on.

  6. Giving the social security tax cut to corporations to help boost the economy and increase hiring is one of the most poorly instituted incentives Congress could come up with. Companies currently have the strongest balance sheets they have had in decades. Companies are hoarding cash because they do not want 2001 or 2008, which bankrupted many companies, to happen to them. This cash hoard is a direct signal that companies cannot find ways to deploy the cash profitably or they are risk adverse because of the uncertainty within the country, mostly due to the direction the politicians are taking us. Companies have proven that even with these cash hoards, they will not significantly increase hiring unless they can deploy capital in a low-risk, profitable way. All of this is at a time when social security funds are at a tipping point with baby boomers retiring at an accelerated pace.

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