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Payroll Tax Holiday – How Much Would It Save You?

by Darwin on September 21, 2010

The Payroll Tax Holiday that was brushed aside by the administration in the past is coming to the forefront again as a possible compromise between conservatives and liberals as a means to help “stimulate” the economy without having some of the same problems the other efforts have had.  Namely, it would actually work…as opposed to the various cash for clunkers, new homebuyer tax credits and other programs that essentially pulled forward demand only to see it sputter immediately upon cessation of the program.

How Would a Payroll Tax Holiday Work?

For a basic Payroll Tax Holiday being envisioned in a centrist fashion, it would provide a tax cut to both businesses AND employees – and would provide a proportionally heavier benefit to those at the lower end of the earning spectrum since the payroll tax is capped at higher incomes as it stands now anyway.  Some basics:

  • The payroll tax funds Social Security and Medicare
  • Totally Regressive Tax since it hits 12.4% [SS portion] (evenly split between you and employer) UP TO $106,000
  • Therefore, a tax holiday would give a 6.2% “bonus” to both employers and employees up on the first $106,000 of earnings
  • Duration would likely be 1 year
  • Given this break, employers may be less apt to fire, more willing to hire and consumers would have more cash to spend, thus stimulating the economy

Under a scenario like this, let’s say you make $100,000 per year.  You’d basically have an additional $6200 this year to spend ($517 per month).  With some prior efforts like a one-time tax credit, tax returns and such, the criticism is that Americans often use that bolus of cash to either pay down credit card debt, put it in a savings account or do something OTHER than spend it to stimulate the economy.  With a longer-term sustained and steady monthly income boost, the thinking is that employees would be more apt to actually increase their consumption of goods and services which may be enough to kickstart the economy again.

Payroll Tax Holiday Politics

This is all hopeful and frankly, I fear that until the environment becomes more business-friendly, hiring will continue to suffer, but at least on the consumer side, we may actually get some benefit here.  Another problem for anyone supporting this bill is that it’s more debt, right?  I mean, this lost funding for Social Security needs to come from somewhere and this comes at a time when it’s looking like we’re going to have to increase the social security retirement age.  Liberals would be likely to offset this revenue reduction with additional taxes on the rich.  Right or wrong, political calculations being what they are, this scenario seems plausible.

Do You Like the Idea of a Payroll Tax Holiday?

{ 2 comments… read them below or add one }

Evan September 21, 2010 at 10:59 pm

I am W2 and Wife is self employed so would I like my 18% back? Hell Yes. But how does a politician justify this move? I’d love to see the calcs on how much quicker it would bankrupt SS.

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Khaleef @ KNS Financial September 27, 2010 at 8:44 pm

I like the idea because both businesses and employees will see a direct benefit. As you said, this should slow down layoffs and maybe even stimulate hiring to a small degree. I also like the idea of it being paid over the year and not just a refund that would not be spent.

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