President Obama and his supporters often complain that he gave everyone a tax cut but nobody on the right wants to give him credit for that fact. The truth is, the Democrats did give us a tax cut, but almost nobody knows about it.
I’m not referring to the temporary two-year increase in deductions and Earned Income Tax Credit that was bundled into the “stimulus” package. That wasn’t an actual reduction in tax rates codified into law, and it expired on December 31, 2010. Technically it meant peoples effective taxes were reduced, but that’s not the tax rate I mean.
No, I’m referring to a tax cut that was passed into law at the same time the Bush tax rates were retained last December, yet got almost no notice, even at the time.
The IRS sent out an email in December of last year to businessmen detailing how this works, but the gist of it is this: your social security deduction (FICA) tax went down from 6.2% to 4.2%. Because of the 1.45% added into your FICA for medicare contributions, your total will be more like 5.65% on your paycheck.
As as an employee you might not have noticed anything because that reduction was at the employee side, not employer (yes, your boss has to pay part of your social security tax), so your employer didn’t get a break here, but you should have seen a slight bump in pay. In the 1960’s your FICA deduction was raised from 4% to 6%, then it went up a bit more over time; now its back closer to the earlier level.
This tax cut was passed as a tax “holiday” to give people a break and some more money in their pockets during tough economic times. It is not permanent, and it is intended to end by 2012. This was passed when the “stimulus” deduction increases were expiring as an extension to help taxpayers during tough economic times.
Here’s the odd thing: Democrats were in charge of congress when this passed, and a Democrat president signed it into law. This is an actual, real tax cut, a reduction in the rate of taxation which you pay which is codified into law and takes another law to change, even if temporary.
Great job on their part, as far as I’m concerned – and high fives all around to the Democrats and President Obama for passing this, too bad you didn’t make it permanent. Maybe the GOP congress can.
The federal government claims this will have no effect on Social Security benefits in the future, but since most people figure the program will have collapsed by the time we retire anyway, I don’t suppose it matters one way or another.
Social Security in the past as been more or less “pay as you go” where tax revenues paid for current recipients of social security. You do not get the FICA taxes you pay put into an account in your name which you realize at retirement. You’re paying for people who’ve already retired.
If you reduce the amount of money being taken in for this, then it has to be made up somewhere else, it seems. Finding out what is being done to make up for that is not easy. Typically the Obama administration simply spends the money and borrows or goes into debt more because nobody can stop them. Is that what’s going on here, with the presumption that they can raise taxes to make up for it later? Certainly the recent raid on federal employee pensions suggests they understand this cannot go on forever.
It is true that some people hit the annual cap of how much they have to pay in FICA each year (around $100,000) before the year is up, and in their case that means no change in terms of revenue: they’re already putting as much up as the government requires, so reducing the rate that happens just means it takes a bit longer in a year. Most folks, however, never hit that cap.
Various commenters around the internet claim that this reduction will be offset from the general fund, but that’s not just contradictory (the social security fund is basically used as part of the general fund) but not reasonable: there’s no money in the general fund. When a nation runs a debt of over a trillion dollars more a month, you can’t borrow from anything – there’s nothing to borrow.
The strange part is that usually Republicans (and conservatives such as myself) cheer at any tax cut and Democrats tend to hate and oppose them. Yet both Republicans and Democrats have been pretty much silent on the topic. Why this is true is anyone’s guess, perhaps Republicans don’t want to give credit to their enemies, perhaps Democrats aren’t real proud of it and don’t want word getting around.
But President Obama did, in fact, sign a tax cut into law, and congratulations to him. It should be noted that the economy started to pick up around the time it became clear the Democrats wouldn’t raise taxes on everyone by ending the Bush tax rates, and this bill passed.
So who knows what’s going on behind the scenes. Some employees will take the few hundred dollars they get from this and invest it in some sort of savings for retirement, or buy something lasting like gold, but I suspect most will just use it to make ends meet, these days.
