No, America: Higher Payroll Taxes Don't Mean Tax Increases

No, America: Higher Payroll Taxes Don’t Mean Tax Increases

Payroll Taxes

The Article: Dear America: Your Higher Payroll Taxes Are Not The Result Of A Tax Increase by Tony Nitti in Forbes.

The Text: When describing what he believed to be the unrealistic alimony demands of a recently-divorced woman who had grown “accustomed” to a certain lifestyle, comedian Chris Rock said, “You go to a restaurant, you’re accustomed to eating. When you leave, you’re not eating anymore. They don’t owe you a steak.”

Fast forward to present day, and Rock may as well have been talking about the expiration of the payroll tax cut.

As a reminder, while the fiscal cliff deal extended the income tax rates for 99% of Americans, one expiring provision that was not given new life by the 11th hour negotiations was the 2% reduction to an employee’s share of Social Security payroll taxes. For 2011 and 2012, employees paid only 4.2% of their wages towards Social Security. Beginning January 1, 2013, that burden has reverted back to 6.2%. As a result, if you earn a salary, you may have noticed that your first paycheck in 2013 was 2% lighter than your last check in 2012, assuming equal pay.

And that has some people awfully mad. Earlier today, a friend of mine sent me a link to the following editorial posted on investors.com, which took aim squarely at the now-expired payroll tax cut. It starts like so:

Dyed-blue-in-the-wool supporters of President Obama are blue as can be after opening their paychecks and discovering that “ordinary folks,” as the president likes to call them, got slapped with a sizeable tax hike on New Year’s Day.

There’s just one problem with this sentence: The expiration of the payroll tax reduction is not a “tax hike.”

When originally enacted in December 2010, the 2% reduction was originally scheduled to last only one year, it’s finite nature evidenced by its description in the statute as a “payroll tax holiday.”

The point of the provision, as you might imagine, was to help lower and middle-class taxpayers weather the recession by putting more after-tax cash in their pockets. Specifically, the payroll tax cut replaced and expanded upon the “Making Work Pay Credit,” which during 2009 and 2010 saved individuals earning less than $75,000 up to $400 and married couples earning less than $150,000 up to $800. Because the 2% payroll tax cut reduction applied to the first $106,800 of a taxpayer’s wages, the new law could save an indivdual as much as $2,136, or twice that for married couples.

As 2011 drew to a close and the sun was due to set on the payroll tax cut, Congress did what it does best, agreeing to a last-minute, ill-conceived two-month extension that was not offset with any increased revenue or spending cuts. In February, they did it again, this time extending the 2% reduction through the end of 2012.

Throughout this time, Americans got accustomed to their fatter paychecks. But if they’d been paying attention, they would have noticed that the end was near.

Leading up to the Presidential election, neither Barack Obama nor Mitt Romney promised to further extend the payroll tax cut. In fact, if one were to dig deep into each man’s tax proposals, one would see that both Obama and Romney intended to allow the tax cut to expire. And effective January 1, 2013, it did.

So as Chris Rock would explain, for two years the government was feeding us extra money in our paychecks. But just because we grew accustomed to it doesn’t mean the government continues to owe it to us.

Continuing on, the investor.com editorial goes on to add this little nugget:

What does it say to these Obama supporters that the first thing the president does after being elected is raise the payroll tax for “ordinary folks” from 4.2% to 6.2%?

If these Obama supporters are rational, hopefully the expiration of the payroll tax cut says to them, “Perhaps you’ll be able to collect pension checks when you retire.”

Remember, our payroll taxes don’t go towards the President’s cigar-and-booze budget; rather, they are earmarked for Social Security, which as you may have heard, is in danger of going bankrupt in the coming decades. Continue the payroll tax cut, and you only increase the burden on our already strained trust fund balance.

It’s foolish to ignore the fact that the payroll tax reduction came with a sizeable price, costing the government nearly $240 billion in tax revenue over the two-year period. And since Congress did nothing to pay for these cuts, the bill simply got added to the country’s tab, further driving up the already bloated deficit. I would think that this would be a trend that neither political party would favor continuing.

The investor.com piece then closes with this:

Then he — or rather the White House auto-pen, since the president took Air Force One back to Hawaii to finish his $7 million-in-taxpayer-cost vacation — signs a deal slapping a middle-class family something close to just that “hit” in new taxes.

Now this…this is just annoying, because the payroll tax debate was not a partisan one. Neither party intended to continue it, and if you want to start pointing fingers, it was the conservative corner of the Republican Party who fought like hell to prevent it from being extended back in February 2012.

The moral of the story is this: I have no idea if the payroll tax cut should or shouldn’t have been further extended beyond 2012. That’s a matter of policy on which I am not fit to opine. Logic tells me, however, that it’s rather silly to react to the expiration of a temporary tax cut by calling it a “tax increase” and blaming the very person who enacted the cut in the first place.

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