Background: Here’s a way to raise tax revenues & create jobs.

In the fiscal cliff talks, I think that the Feds – both Obama & Congress – are demonstrating “no brain” thinking – working ineffectively on the wrong stuff.

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Specifically, in the fiscal cliff talks, practically all of the focus has been on jacking up the marginal tax rates for millionaires and billionaires making more than $250,000
.

Payroll taxes – for Social Security & Medicare – have been largely pushed off-stage.

That’s because both Dems & the GOP seem to agree that the 2% payroll “tax holiday” should be allowed to expire.

That may be true, but I think the payroll tax structure may be the key to hitting the seemingly conflicting objectives of raising tax revenues and creating jobs.

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Let’s lay out some basics:

What happens to whom if the current payroll tax holiday expires?

According to CNN-Money, If the payroll tax cuts expire, 125 million households would be impacted … mostly middle-class households.

Putting that number in context, it’s a far bigger slice of the population than the group of Americans who would be affected by proposed income tax hikes.

  • If marginal tax rates are raised on incomes exceeding $250,000, roughly 2.8 million households would be impacted.
  • Only 368,000 Americans would feel a tax hit if marginal rates rise on incomes above $1 million.

What’s the financial impact to tax payers?

If the payroll tax holiday expires, the payroll tax rate would revert from 4.2% to 6.2% on the first $113,700 in earnings.

In other words, folks earning below $113,700  will have their paychecks shrink by 2%.

That’s $1,000 for a household earning the median $50,000

… $2,274 for an individual earning $113,700  – the earnings tax base maximum.

… $4,548 for a dual-income household with both workers earning at least $113,700

Suffice it to say, a big impact to many pocketbooks … and the macro economy.

So, why not extend the payroll tax holiday?

Couple of reasons …

First, a lot of tax revenues would be lost.

In rough numbers, about $1 trillion is raked in annually in payroll taxes … from employees and employers,

So, a 2% reduction on the employee side “costs” about $125 billion per year.

That’s serious dough.

Especially, since both Social Security and Medicare – the designees of the payroll taxes — are facing their own fiscal cliffs … i.e. looming insolvency.

Purists argue that the Social Security & Medicare Trust funds should be sacrosanct … remember Al Gore’s “lock box” idea?

Well, reality is that – since LBJ started treating the trust funds as piggybanks to fund the Viet Nam war – the direct connection between payroll taxes and those programs has been a bit tenuous.

This is an important point.  Once you accept that payroll taxes have become simply another means of general taxation, the my recommendation falls neatly into place.

Next up, Ken’s plan to raise tax revenues and create jobs …

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One Response to “Background: Here’s a way to raise tax revenues & create jobs.”

  1. To grow the economy and employment, revamp the payroll tax system. « The Homa Files Says:

    […] For more background details, see our prior post Background: Here’s a way to raise tax revenues & create jobs. […]

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