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.