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Payroll Tax Cut Extended

Late last week, members of Congress decided to go ahead and extend the payroll tax cut through the end of of 2012. Set to expire at the end of 2011, the payroll tax cut [3] was extended by a couple of months as a stop-gap, and now has been extended through the end of the year.

The move is designed to keep the employee portion of the payroll tax at 4.2%, instead of the usual 6.2%. Employers still pay their entire portion of the payroll tax. The extension came as Republicans backed off their opposition to the measure following a bruising battle in December, during which voters expressed their displeasure with the idea that the payroll tax cut might not be extended.

What is Included in Payroll Tax Cut Extension Bill?

The $150 billion Middle Class Tax Relief and Job Creation Act of 2012 does more than extend the payroll tax cut. It also extended unemployment benefits, and prevents a drop that doctors would receive in Medicare compensation. The bill also expands the “work sharing” concept that encourages companies to keep employees at least part-time, rather than laying them off completely, and provides funds for those engaged in job training. Self-employed entrepreneurs will also have access to some unemployment benefits.

The idea is to keep voters in both parties happy in an election year, and to, hopefully shift some of the unemployment benefits away from just paying jobless benefits to encouraging the under-employed to develop marketable skills.

There are estimates that the payroll tax cut [4] extension will result in about $1,000 in take home pay for many working Americans in 2012. It’s also worth noting that many Americans viewed the expiration of the payroll tax cut as a tax increase, since they had become used to seeing the “extra” money in their paychecks.

What About Social Security?

By now, many believe that the Social Security “trust fund” is little more than a joke. Questionable accounting methods have been using money from the fund to offset huge federal deficits. The payroll tax cut will further reduce the amount of money available for the future. However, there probably aren’t many Americans too concerned about that right now. Most are likely concerned about the more immediate future, and interested in the take home cash as part of their paychecks.

In reality, the payroll tax cut runs the risk of becoming a permanent fixture. After all, no one wants to see their paychecks decreased over the course of the year. Getting rid of the payroll tax cut, even though it was supposed to be a natural process, still feels like a tax hike. And, with the recession still a very recent memory — and another recession a possibility for the near future — few voters are willing to settle for what they consider a tax hike.

However, with the payroll tax cut extended through the end of the year, there is a chance that it will simply be allowed to expire once the elections are over. There won’t be the need for trying to placate voters, and mid-term elections will still be two years away.

What do you think about the payroll tax cut extension?

(Photo: dmmd303 [5])