The payroll tax is a tax on covered wages that is paid by employers and employees. The revenue collected from the tax is used to finance Social Security benefits and certain Medicare benefits. The Federal Insurance Contributions Act (“FICA”) imposes a tax on employers based on the amount of wages paid to an employee during the year. The tax, as imposed in 1975 was composed of two parts: (1) the old age, survivors, and disability insurance (i.e., Social Security) tax; and (2) the Medicare hospital insurance tax. In addition to the tax on employers, each employee is subject to FICA taxes equal to the amount of tax imposed on the employer. The employee tax generally must be withheld and remitted to the federal government by the employer on a regular basis throughout the year (weekly, monthly, quarterly or annually) depending on the employer's level of total payroll tax withholdings. Put simply, the payroll tax is purely dedicated to funding Social Security and Medicare.
Prior to 2011, employees and employers each paid 6.2% of covered earnings (for a total of 12.4%) up to an annual income limit. Under the Self Employed Contributions Act (“SECA”) – which covers self-employed individuals in the same way that FICA covers employers and employees – self-employed individuals paid 12.4% of net self-employment income up to an annual income limit. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the FICA tax rate for employees by two percentage points for calendar year 2011 (from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed under SECA). The law made no changes to the payroll tax rate for employers (6.2%) or to the amount of annual wages and net self-employment income subject to the Social Security payroll tax ($106,800 in 2011).
To protect the Social Security trust funds from a loss of payroll tax revenues resulting from the payroll tax reduction, the law requires appropriated amounts to “be transferred from the general fund at such times and in such manner as to replicate to the extent possible the transfers which would have occurred to such Trust Fund had such amendments not been enacted.” In other words, the temporary payroll tax reduction was an attempt by President Obama to provide more “stimulus” to the economy, while increasing the nation’s debt.
When the payroll tax reduction was first enacted in December 2010, the unemployment rate stood at 9.4%. Joblessness started to decline in the subsequent quarters, getting as low as 8.8% in March 2011. However, the rate has since moved in the opposite direction, back to 9% or above for the past four months. This fluctuation correlates to the transitory impact that such a temporary tax cut has on economic activity. Additionally, the economy has grown at an anemic rate. Investor’s Business Daily agrees:
In January, Vice President Joe Biden took to the pages of USA Today to boast that the just-enacted payroll tax cut "will put $112 billion into the pockets of 155 million workers, who will then inject it back into the economy, spurring growth and creating jobs."
Things haven't quite work [sic] out the way he predicted.
So far this year, real consumer spending has been flat, after climbing steadily in 2010. GDP growth has been almost nonexistent, climbing at annualized rates of just 0.4% in the first quarter and 1.3% in the second.
That's in contrast to last year's 3% growth. And the unemployment rate is 9.1%, up from 9% in January.
The simple fact is that this sort of temporary tax gimmick has repeatedly failed to stimulate anything beyond bigger federal deficits.
The Department of Commerce, on August 26, 2011, reported that the economy grew even slower than previously reported, revising downward its earlier estimate of GDP in the second quarter from 1.3% to a disappointing 1.0%. Clearly, this type of economic “stimulus” has not worked, but economic uncertainty for job creators remains due to the president’s policies, including the “temporary” status of the payroll tax reduction and the increase in the nation’s debt by transferring money from the general fund to make up the loss revenue in the Social Security trust fund.
Marginal income tax rate reductions affect economic incentives. When Republicans provided tax relief in 2003, the amount of revenue collected by the government went up by more than $700 billion over five years and the deficit went down. Each time our nation has reduced income tax rates significantly, economic growth has followed. When Ronald Reagan lowered tax rates in the 1980s, real economic growth averaged 3.2% per year, and federal revenue actually increased 20%. When John F. Kennedy reduced marginal rates in the 1960s, we experienced several years of 5% economic growth.
History has shown that appropriately designed tax relief spurs economic growth, allowing hardworking individuals and families to keep more of what they earn without depleting the Treasury. America’s job creators need fundamental tax reform that puts an end to loopholes and complicated deductions and broadens the tax base. We need to simplify the tax code to grow our economy and make it more competitive. Then, America’s families can go back to work.
Present Law and Historical Overview of the Federal Tax System: http://www.jct.gov/publications.html?func=startdown&id=3719
In March 2010, Congress enacted a temporary payroll tax reduction for employers, as part of the HIRE Act (PL 111-147). For 2010 only (i.e., through December 31, 2010), employers were exempt from the employer's share of the payroll tax (6.2%) related to hiring an individual who had not been employed for more than 40 hours during the previous 60-day period.
Investor’s Business Daily, The Payroll Tax Cut Is Class Warfare, http://www.realclearmarkets.com/articles/2011/08/25/the_payroll_tax_cut_is_class_warfare_99215.html
Department of Commerce’s Bureau of Economic Analysis: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
Office of Management and Budget, Historical Tables: Table 1.1 Summary of Receipts, Outlays, and Surpluses or Deficits (-): 1789–2016: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2011/assets/hist01z1.xls