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Democrats & Republicans Discuss New Payroll Tax Cut

At the end of this year, the payroll tax holiday will expire [3] and workers are going to see their paychecks shrink a little bit. Democrats have proposed [4] 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 [5]. 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 [6] 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 [7] 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 [8] 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.