Tuesday, January 4, 2011

Payroll Tax Cut

As always, the new year brings a raft of changes to laws and the tax code.  One such change that will likely affect all of us is the payroll tax cut.  As signed into law by President Obama last month, the average American will see a significant tax break.  Normally, Social Security is taxed as 6.2% of an individual's paycheck - in 2011, that rate will be reduced to 4.2%.  The tax cuts only apply to the first $106,800 in wages - this means that the cut is specifically targeted at  upper-middle, middle and working class (about 155 million Americans).  The total effect of the cut will be an infusion of $120 billion into the economy.  One of the biggest positives of this cut is that it will be instantaneous - we will start seeing it in our paychecks now.

So what are the cons?  Well, money will be lost in the Social Security Trust fund - which means that the government will have to borrow in the short-term to cover the missing funding.  The total borrowing will likely be $112 billion.  Since the cut is temporary, the White House insists that it will have no long-term effect on Social Security - but there are fears among the plans detractors that the plan will become permanent.

What do you think?  Is this a good idea - and are the benefits worth the costs?

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