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Democrats & Republicans Discuss New Payroll Tax Cut

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At the end of this year, the payroll tax holiday will expire and workers are going to see their paychecks shrink a little bit. Democrats have proposed a new payroll tax cut that would trim Social Security payroll taxes in half, from 6.2% to 3.1%. Employers would also see the same cut on their side of the payroll tax on the first $5 million of their payroll. This would be paid for by a permanent tax on taxpayers who earned more than $1 million.

Initially, Republicans spoke out against it, saying this hurts businesses, but eventually they backtracked and offered their own proposal. Again, I’m always surprised whenever anyone argues this point because these taxes are paid on profits, not income. Businesses hire people when they can earn more than the employee costs. Taxes on profits happen after that decision so it really has no bearing. Mark Cuban discussed this very issue several months ago (go down to 3. Taxes Vs Job Creation) and it boggles my mind why this keeps coming up. Anyone who has actually run a business knows this is true (I can understand not liking it because you have profits over $1 million and you don’t want to pay more taxes, but don’t hide behind job creation).

One thing I am pleased to hear is that the Republican party has backed away from the “we’re against anything the Democrats are against” strategy, at least on this point. I’m all for different opinions but nothing good comes out of “we’re anti-Obama so we can get our person elected.”

The Republican proposal puts a three-year freeze on federal civilian worker pay, reduce the size of that workforce by 10% through attrition, prevent millionaires (AGI over $1 million) from receiving unemployment benefits and food stamps, and make them pay full price for Medicare Parts B and D.

Last Thursday, both plans were predictably blocked but the two sides are working on a compromise that would get the tax cut done. Today, Democrats are set to come up with a new way to pay for the deal. We’ll have to see what that plan is.

As for businesses, this is a boost for self-employed workers as this means you’ll be getting a 6.2% pay bump (since self-employed workers pay both sides of Social Security payroll taxes) and small businesses will see a 3.1% trim in their payroll taxes. This won’t get our economy back to gangbusters growth but it’s not designed to, it’s designed to put a little extra cash in your pocket so you’ll spend it.

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22 Responses to “Democrats & Republicans Discuss New Payroll Tax Cut”

  1. Courtney says:

    As a contractor who is paid according to federal civilian worker pay scales, I’d personally rather see it expire than see the Republican’s plan go through. The GS pay scales have already been frozen for 2011 and 2012. I’d rather pay the extra 2% next year than face the prospect of no raises for a total of 5 years.

  2. Tony Lovasco says:

    First, let me say that I support continuing the payroll tax cut. As Republicans are quick to point out, ending a tax cut is a tax increase. And I’m against tax increases.

    That said, I find it insane to “pay” for the tax cuts by increasing taxes on the rich. First, your comment that doing so doesn’t slow the creation of jobs is completely wrong. Yes, the tax comes on profits, which are after the expense of hiring workers. But faced with losing profits or cutting jobs, businesses are going to obviously cut jobs (or at the very least, stop hiring new workers). So the more you tax them, the less profits they have, and the more they’ll look to recoup those profits by cutting the workforce.

    The real solution is to simply cut the size of the government and stop spending money on worthless and unnecessary things.

    • NateUVM says:

      That’s not quite true, Tony.

      Generally (there are always exceptions), why does a business hire someone? It would have to think it could make more money with the addition of that employee, right? After all, if it lost money, why would it make that hire? Therefore, we can assume that, everything being equal, the cost of having that employee (payroll, etc…) is less than the income that employee provides. Thus, having that employee has the net effect of generating a profit.

      So, revisiting your scenario, why, after having their profits eaten into by a rise in taxes, would a business chose to further hurt its profit by laying off an employee? An employee that they’ve already decided generates a profit for them?

      Again, this is assuming all else is equal (economy, industry conditions, etc…) and that hiring the employee was a prudent decision in the first place.

  3. Courtney says:

    Ending a TEMPORARY tax cut is not a tax increase, and I hate that this is being spun by both parties in exactly the same way as the planned expiration of the Bush Tax Cuts.

    Taxes do not drive jobs. Demand drives jobs.

  4. Tony Lovasco says:

    Any time the government takes more money away from you than the amount they are currently taking, that is a tax increase. Simply saying “well we planned to take more money from you all along, and now that day is here” doesn’t change the fact that they now are taking more money from you than the day before.

    As for jobs, you are partially correct. Demand does drive jobs, but only in the sense that demand for a company’s goods increases their sales, and thus profits. And when a company has extra profits, they often re-invest those profits in expanding the company, on the assumption that doing so will allow them to make even greater profits later on. If their taxes are increased, they may instead decide to shrink their company in an attempt to keep their profits from shrinking. Which in turn causes job loss — or a the very least, a stoppage to any planned expansion.

    • Courtney says:

      That makes about as much sense as saying that a store increased prices after their “One Week Only 20% Off Sale” ends.

      And I’m not even going to argue the second paragraph, because I’ve already pointed out that the Democrats are talking about an additional PERSONAL income tax bracket and not a change to the CORPORATE tax brackets.

  5. Arvin says:

    I sympathize with a lot of what you’re saying (I am a small business owner, though mostly as a freelancer). But isn’t your scenario a bit like the “rich” punishing their workers because of a threat that the government will take away the icing from their cake?

    And meanwhile I don’t see the rich spurring job creation while corporate tax is the lowest it’s been in history; there seemed to be plenty of jobs 40 years ago when taxes were much higher, and as taxes have dropped corporations have continuously moved jobs out of the country. Sounds like their highest priorities will always be to make the most profit as possible, even and especially at the expense of American workers, so I don’t think they should be able to claim “for the good of the economy” as an excuse why they should get favored perks.

    • Arvin says:

      The preceeding comment (and this one) was intended for Tony, btw.

      And as an aside, Tony, do you know that the biggest tax break for a business is to HIRE workers? If businesses don’t want to pay taxes, hire workers. You get to deduct your expenses incurred by compensating that worker off your business income.

      If a corporation wants to take their 1 billion dollars in profit and spend it all on workers, equipment, guess how much tax they have to pay on that 1 billion dollars? ZERO, because they will have spent it all on business expenses, all the while expanding their business AND spurring the economy by hiring workers (increasing the disposable income that would let them buy the products and services you provide), and also spending that money on goods and services from other companies. Hell they could take the 1 billion dollars in profit and hire some of the out of work college students in America and invest in some R&D to get a head start on the next step of your industry… the next Google, or the next iPhone.

      But corporations who want to hoard the 1 billion in profit do NOT deserve our help, and in fact since they are only choosing to profit and not spend, are taking advantage of government infrastructure like roads, water, electricity, FIRE AND POLICE, but don’t want to pay for it.

      Get over yourselves.

      Signed – a freelancer.

      • DonC says:

        um, the corporation that makes a billion in profit pays a heck of a lot of taxes. Stop making sucessful corporations into the villians. Ask any state govenor. They’ll all fight to have that corporation do business in their state. Start looking at the millions that pay a tiny fraction in taxes or even no taxes at all. Who’s really taking advantage?

        • Arvin says:

          Answer the question please: if corporate tax rates are the LOWEST they’ve been since the Great Depression, why have they continued to take jobs out of the country? Why do they keep insisting on having taxes taken out on people who used to have those jobs, and now have been fleeced to the point where the market for goods and services have been completely shot because people no longer have disposable income, and then demand government bailouts because they’re “too big to fail?”

          http://visualecon.wpengine.netdna-cdn.com/wp-content/uploads/Income_Corp_CapitalGains_Rates-650×603.png

          Look at the graph and tell me what the top marginal tax rate was for the most prosperous moments in American history.

          If you want to make a profit off of hardworking Americans so you can hoard cash you can at least stop being hypocrtical about it and just admit you like being greedy.

        • Courtney says:

          Everyone gets the same benefit of exempting the first X amount of money from taxes whether you make $20,000 or $20M. Everyone takes advantage of that benefit regardless of their incomes. That’s pretty much the textbook definition of “fair”.

  6. Courtney says:

    Arvin – good points. But we’re not even talking about corporate taxes here. We’re talking about PERSONAL income taxes on a MODIFIED ADJUSTED GROSS INCOME of over $1M. I typically hate typing in capital letters but I really felt the need to emphasize that these are individuals who have income over $1M after deductions and exemptions. And somehow it’s more “fair” to accelerate the demise of social security on the backs of mostly middle class government employees and contractors, instead of asking the wealthiest of the wealthy to pay 3 cents more per dollar of income OVER $1M?

  7. Guest says:

    I find it interesting whenever someone says taxes and jobs are not linked or connected. I have literally sat in meetings where we let go of people in the US and relocated their jobs to Singapore, specifically due to taxes. The point isn’t whether it is right or wrong – the point is that this is very real and I suspect not isolated to my company. So go on and cast shame at profit hungry investors or criticize that it is not patriotic, etc. But don’t say there is no link between corporate taxes and jobs. I’ve witnessed it first hand.

    • Arvin says:

      I’m not saying you didn’t make tough choices in that situation, but corporations have been cutting jobs and moving them overseas even as taxes have dropped levels unseen since, guess what, the Great Depression. The economic boom of the 40′s, 50′s, and 60′s had marginal tax rates in the 90 PERCENT!

      Sadly companies who move jobs out of the country will do it for any reason to increase profits, regardless of whether there’s taxes or not. It is simply the “easiest” thing for people to do to increase their bottom line.

      • Anonymous says:

        Sorry Arvin, Companies are facing stiff competition and faced with bankruptcy or outsourcing jobs I would prefer they outsource jobs and stay in business. I do not view corporate America as “owned by the community” but rather the responsibility of a corporation is to their investors (owners) to stay in business and stay profitable. The only possible solution would be to make it illegal to outsource jobs but then that would be a different form of government and, really, I prefer capitalism. We need to get our hands out of business’ pockets and let them run a business.

  8. Donald says:

    The Republicans oppose any tax increase on high income earners because they are supposedly “job creators”. It seems to me that some high incomer earners may be job creators and others may not be. Am I wrong to make this distinction? It also seems to me that some government spending creates jobs, while some is neutral as far as job creation goes and some is completely wasted. Why are our politicians not capable of making such distinctions? Do they imagine that voters are really so stupid?

    • Courtney says:

      Seems like the simple answer would be to raise the upper tax brackets drastically, and then give big tax credits for created jobs. That would benefit the ACTUAL job creators.

  9. Courtney says:

    I tried to post a comment last night, and somehow it never showed up in the thread…

    The comments about corporate taxes are not really relevant here, because the Democrats are not taking about the corporate tax rate. They are talking about the PERSONAL tax rate for people who have adjusted gross incomes (after deductions and exemptions) over $1M. It’s just a seventh tax bracket.

    Somehow the Republicans think it’s more “fair” to accelerate the demise of social security on the backs of mostly middle class government employees and contractors, instead of asking people to pay three cents more on the dollar for income OVER $1M.

  10. dave says:

    Taxes kill jobs because employers have less money to hire workers

    • Courtney says:

      Do you even know how corporate taxes work? Employee payroll is a business expense; companies only pay taxes on profits. Profits = revenue – expenses.


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