Here we are, on “the other side” of the Fiscal Cliff, having avoided most of the monstrous tax increase that loomed before us and at least postponed the dreaded spending cuts from “sequestration” (a word with which even the President struggles). So what is the big focus of the mainline media: “Payroll Tax”.
Every report I have watched or read has emphasized the financially debilitating impact of an added 2% deduction from each worker’s paycheck, but has failed to adequately emphasize that this added tax is (in no way) a new tax! Instead, it is the non-renewal of a two-year tax-break!! There is a world of difference between the return of a temporarily suspended tax and the imposition of a new tax; but that crucial distinction seems to be lost in the media’s rush to grab our attention and enhance their viewer numbers.
So what is this “Payroll Tax” supposed to do? It is the life’s blood of the Social Security Administration (SSA) – that funds and administers the essential benefits paid out each month to retirees, widows, the disabled, and all others who qualify! Since the creation of the SSA in August of 1935, the Federal Insurance Contributions Act (FICA) has assessed both employers and workers 6.2% of qualifying wages as revenue for social security.
When and why was this tax lowered by 2%? At the end of 2010, during some of the darkest days of the current recession, as Congress struggled with the proposed extension of the so-called “Bush tax cuts”, the decision was made to try to stimulate spending by reducing the employee share of FICA from 6.2% to 4.2%, but only temporarily (until December 31 of 2011). As the end of 2011 approached, Congress extended this tax relief through 2012.
Therefore, as the Fiscal Cliff loomed last month, the extension of this temporary tax break was a small part of the deliberations. Because broad consensus exists that federal “entitlement” programs, as currently configured, are not financially sustainable, and the funding “hole” created in social security by two years of reduced revenue, the decision was made to not renew the break on FICA.
Unfortunately it is extremely easy for taxpayers to accept a tax reduction, and very frustrating for tax payers to have a tax break “taken away”. Public awareness of the facts and acceptance of this change becomes extremely muddled when the media hype the tax “increase” instead of clearly reminding all involved that for the past two years, they enjoyed the “gift” of 2% in extra income! As my dad used to say: “Never look a gift horse in the mouth.”
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