Monday, September 12, 2011

MY THOUGHTS ON THE PAYROLL TAX CUT IN OBAMAS NEW PLAN

President Obama will send his new jobs creation plan to Congress on Monday September 12th. He pitched it first in the Rose Garden surrounded by the kinds of folks that make for good press (vets and teachers, for example) and then send it to Congress for consideration.

I am not going to comment on all of the details of the plan at this time. First of all the press has given the details plenty of coverage and more importantly the specifics of the plan change and it goes through the legislative process. Outlining it early seems to confuse people when provisions that started out in the plan change. Once we see what the final bill, if any, looks like we will let you know.
I do want to give you my thoughts on the payroll break that is in the plan. Obama wants to extend the holiday and make the cut even deeper. The extension is a no-brainer.

Impact on Individuals

Making the cuts a bit larger is an interesting suggestion. Clearly, taxpayers like it when taxes get cut. But let’s keep this in perspective. It’s not a huge benefit for most taxpayers (a family making $40,000 would keep an extra $440 over the span of the year – or about $8/week). But most concerning, these are cuts to payroll taxes which are out of the Social Security fund. The Social Security fund is in enough trouble already and now they are putting less money in. That is hard for me to understand. How are we going to make that up later? Oh I know… Thanks kids and grandkids. Constantly banking on the idea that we’ll make up extra funds later is how we’ve gotten ourselves into the pickle we’re in now.

Impact on Business

Obama also wants to cut payroll taxes for businesses by 50%, to 3.1%, on the first $5 million in wages. As a business owner, I love this idea. But as a tax professional, I worry about it – for the same reasons articulated above. And I will say that while the cuts might make me happy because it’s less money out of my pocket, it wouldn’t make my business likely to hire new employees. Temporary fixes like that rarely benefit small businesses, in my opinion, because the long term consequences of a new hire are so uncertain. With the added responsibilities under the new health care law, for example, a temporary cut in payroll taxes won’t encourage small businesses to hire. I think they’re still going to be looking to cut employees – and take on cheaper, benefit-free independent contractors – rather than make new hires for employers. But maybe that’s just me.
In contrast, another business tax break in Obama’s plan that I do think has legs is the tax credit for hiring workers who have been out of a job for at least six months. The break is a $4,000 tax credit – not bad. Remember that tax credits are a dollar for dollar reduction in taxes which can be fairly significant, depending on your tax rate.

In terms of comparison of the two employer-side tax breaks, the tax credit for new hires is equal to the suggested “payroll tax cut” for employers paying nearly $130,000 in wages. In other words, you would pay $130,000 in wages as an employer under the new scheme before you would “save” as much as the amount of the credit. However, the payroll tax cut puts more in your pocket as you go while a tax credit generally gives you more of a benefit come tax time.