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  • Payroll Tax Holiday: Misguided Reform to Social Security Financing

    Where's the surplus?

    Despite efforts by Senator Baucus (D-MT) and Senator Grassley (R-IA) to draft a broad and bi-partisan federal legislation as part of another round of federal “stimulus” Senator Reid (D-NV) has now derailed the endeavor.  After eliminating most of the tax cuts in the bi-partisan effort put forward by Senators Baucus and Grassley, one of the few “tax cuts” Senator Reid has retained is the payroll tax holiday plan.

    What is the Payroll Tax Holiday? Sec. 101 of the Hiring Incentives to Restore Employment (HIRE) Act outlines a suspension during 2010 on the employer share of the Social Security OASDI (Old-Age, Survivors, and Disability Insurance) payroll tax.  The OASDI payroll tax is normally divided into an employer and an employee share, where each is responsible for 6.2 percent on total payroll (or wages earned for employees).  Sec. 101 only applies to qualified employers hiring a qualified individual from February 3, 2010 to December 31, 2010.  It largely excludes public sector organizations hiring workers, except for “post-secondary educational institutions”.

    How Will This Impact Employers? As evidence by continuing unemployment trends during 2009 and now into 2010, it is clear that firms have suspended hiring workers – and in many instances fired current workers – because of the significant drop in demand for goods and services.   In the absence of real demand for these firms’ products, it is reasonable to assume most employers will not react strongly to this temporary incentive to hire. Participating in the payroll tax holiday program will reduce the cost of labor during the eligible time frame, although temporarily and not by a large share.

    How Is It Financed? The payroll tax holiday program will be financed with money from general revenues.  Specifically, those funds otherwise used from the Treasury—amounting to lost revenue in the Federal Social Security OASDI Trust Fund—will be “replenished” with equal amounts from the federal general revenue account.

    Implications to Social SecurityThe Social Security system is effectively drained of real money.  In 2009, Social Security ran on a deficit of $4.3 billion, and by 2016, these deficits will continue to grow permanently. In 2020, the annual deficit is project to reach $68.5 billion. Financing deficits in one program with deficits from another – the White House has already released its $1.57 trillion federal deficit-spending agenda – means that the real cost of the proposed $13 billion of this hiring incentive plan will be much higher and permanently add to growing Social Security debt.  Moreover, any shift towards a partial general revenue financing arrangement of Social Security opens the way to a back-door tax increase that everyone will incur down the road.

    Moving Forward.  At this nexus, Congress should concertedly reconsider passing a “jobs stimulus” plan that will 1) potentially create a net decline in employment, 2) fail to provide incentives for productive and permanent employment; and 3) contribute significantly to the on-going deficits in the Social Security system—especially if the financing involves deficit spending from general revenues.  A more promising message to employers of all sizes would be if Congress commits to reducing burdensome regulation, taxes, and federal government spending that all contribute to the crippling uncertainty of planning and operating a business.

    Posted in Economics [slideshow_deploy]

    13 Responses to Payroll Tax Holiday: Misguided Reform to Social Security Financing

    1. valerie Doull says:

      Can the American people sue the government for spending our Social Security? This was put in a trust for all Americans that paid into it. Why can they get away with taking the money and putting IOU's in their place?

    2. J.C. Hughes, Texas says:

      Allow me to suggest:

      1.let states develop their own social security and healthcare programs while phasing out federal SS and medicare through attrition.

      2. repeal the 16th amendment.

    3. Lloyd Welch Valdese, says:

      This bill is nothng but a scam to totally bankrupt Social Security so then democrats can say, see we told you so. Harry Reid is nothing short of a con artist. I wouldn't give him any more credence than I would Obama or Polosi who I literally will not believe one word which comes out of their collective mouths. Health care is one of those things that the Constitution has nothing to say about, which leaves it to the states and the people. Likewise providing jobs. This is something the federal government has no authority to act on. It is the federal governments place to provide free interprise a helpful atmosphere to do what it does best. When will they learn that what they need to do is back off and let free interprise WORK.

    4. J.C. Hughes, Texas says:

      Valerie, the federal government gets away with it because its vast size is far too removed from the people it serves. Such large bureaucratic social programs by nature are poorly managed and riddled by waste and abuse. This is just one reason why these programs belong at the state level.

    5. Pingback: Must Know Headlines 2.16.2010 — ExposeTheMedia.com

    6. Concerned, Mequon WI says:

      As a small business owner the tax incentive means nothing. What's a $5,000 credit opposed to a full salary and benefits. The insurance coverage is more than that. It's obvious these people never ran a business.

    7. Pingback: Morning Bell: Don’t Celebrate First Failed Stimulus with a Second One | The Foundry: Conservative Policy News.

    8. Ben C. Ann Arbor, MI says:

      Concerned – I agree. It is painfully clear Congress does not have a clue about running a business. How can they when they are mostly lawyers and career politicians. If Congress really wants to help consider looking a what Calivin Coolidge did when President prior to the "roaring twenties." The much maligned "supply side economics" works a whole lot better than "top down socialism." If Congress wants me to hire more people then let me expense items and use contract labor with fewer restrictions. If you give me the tools to create wealth( by getting out of my pocket book) I will expand faster than one can imagine. The tools are: less government intervention with less taxation and regulation.

      And as for the recent meeting with Sharpton et al – give me a break. Al has never had a real job – not even a church. What the H E double hockey sticks does he know about employment? If The POTUS wants to help he should go on permanet vacation and let the business owners get to doing what they do best – work!

    9. Drew Page, IL says:

      Of course Social Security is bankrupt, the government keeps dipping into it and leaving IOUs. the IOUs keep accumulating and we get to pay for them through higher taxes. I recently retired and I can't remember a single time when anyone in government announced that it was taking money from the S.S. Trust fund to cover government expenditures for purposes other than S.S. This way the government can say "see, we didn't raise taxes".

      I live in Illinois (the President's home state) where the theft of public money has been elevated to an art form. Like the Federal government, Illinois has used funds that were earmarked for public employee pension funds, self insured health plans and Medicaid to increase the size of state government. For years the politician's responses were "let the next guy worry about it.

    10. Pingback: Morning Bell: Don’t Celebrate First Failed Stimulus with a Second One | Step Down Obama

    11. Pingback: The Stimulus: An Unhappy Anniversary « OSPRI BLOG

    12. It all depends upon says:

      This week Senate Minority Leader Mitch McConnell suggested suspending the Social Security payroll tax for a period of time, as a stimulus measure. A payroll tax holiday, however, would both be costly — a two-month suspension could cost about $120 billion, for example[1] — and likely relatively ineffective as a stimulus measure. Public resources would be better spent on stimulus measures with a higher “bang for the buck,” such as the Making Work Pay tax cut that President-elect Obama has proposed.

      I say, give the EMPLOYEES a two month payroll tax holiday on their share of the tax, but do it according to Obama's "Making Work Pay" method, to pump the money back into the economy, not wealthy savings that aren't even creating small business loans.

      http://www.cbpp.org/cms/index.cfm?fa=view&id=… for the reasons why this would be more effective.

      Then give the EMPLOYERS a tax holiday every other month for the next year, based upon the ratio of new hires to the existing payroll headcount. For example, if the company increases the payroll headcount by 1%, they earn the payroll holiday for every new hire; by .5%, they earn a holiday for every other new hire at an equal or lesser pay rate.

      For companies who increase payroll by 4, 5 or 6%, they should get the payroll holiday for a matching number of positions at the same or lower pay rate than the new hire. That is, for a payroll increase of 5%, the employer gets the payroll holiday for each new hire plus 4 existing employees at the same or lower pay scale.

      As they continue to hire, their tax savings in the remaining months increase, but they are not retroactive and the program ends in a year, encouraging corporations sitting on huge piles of cash to hire soon and often.

      By basing it on an increased head count, those hired as replacements do not unjustifiably trigger the tax holiday. Also, this method of scaling the benefit is fair to all sizes of employers.

      By all means, let the Bush tax cuts expire for those earning $250K or more. 70% of Americans support this. Only 3% of those incomes belong to small business owners. So the argument that it will stifle job creation is DOA. Any taxes saved by the wealthy do little to stimulate commerce, compared to the average wage earner. They just go into savings, and the banks aren't even using them for small business loans. The average wage earner spends the majority of every additional dollar earned.

      Eliminate tax cuts and loopholes for oil companies, unless they are investing in new forms of renewable energy. We don't need to grow our dependence upon oil; we need to replace it. Use the taxes recouped from both of these to fund the tax holidays and programs to enable local banks to loosen up the tight credit for small businesses.

    13. David Dows, PA says:

      This week Senate Minority Leader Mitch McConnell suggested suspending the Social Security payroll tax for a period of time, as a stimulus measure. A payroll tax holiday, however, would both be costly — a two-month suspension could cost about $120 billion, for example[1] — and likely relatively ineffective as a stimulus measure. Public resources would be better spent on stimulus measures with a higher “bang for the buck,” such as the Making Work Pay tax cut that President-elect Obama has proposed.

      I say, give the EMPLOYEES a two month payroll tax holiday on their share of the tax, but do it according to Obama’s “Making Work Pay” method, to pump the money back into the economy, not wealthy savings that aren’t even creating small business loans.

      http://www.cbpp.org/cms/index.cfm?fa=view&id=… for the reasons why this would be more effective.

      Then give the EMPLOYERS a tax holiday every other month for the next year, based upon the ratio of new hires to the existing payroll headcount. For example, if the company increases the payroll headcount by 1%, they earn the payroll holiday for every new hire; by .5%, they earn a holiday for every other new hire at an equal or lesser pay rate.

      For companies who increase payroll by 4, 5 or 6%, they should get the payroll holiday for a matching number of positions at the same or lower pay rate than the new hire. That is, for a payroll increase of 5%, the employer gets the payroll holiday for each new hire plus 4 existing employees at the same or lower pay scale.

      As they continue to hire, their tax savings in the remaining months increase, but they are not retroactive and the program ends in a year, encouraging corporations sitting on huge piles of cash to hire soon and often.

      By basing it on an increased head count, those hired as replacements do not unjustifiably trigger the tax holiday. Also, this method of scaling the benefit is fair to all sizes of employers.

      By all means, let the Bush tax cuts expire for those earning $250K or more. 70% of Americans support this. Only 3% of those incomes belong to small business owners. So the argument that it will stifle job creation is DOA. Any taxes saved by the wealthy do little to stimulate commerce, compared to the average wage earner. They just go into savings, and the banks aren’t even using them for small business loans. The average wage earner spends the majority of every additional dollar earned.

      Eliminate tax cuts and loopholes for oil companies, unless they are investing in new forms of renewable energy. We don’t need to grow our dependence upon oil; we need to replace it. Use the taxes recouped from both of these to fund the tax holidays and programs to enable local banks to loosen up the tight credit for small businesses.

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