How the payroll tax cut affects consumers

Social Security

Does the payroll tax cut help the economy when it needs it, or does it tarnish Social Security for the future? Image: Fabricator of Useless Articles/Flickr/CC BY

Last week, congress voted to extend the Payroll Tax Cut through 2012. President Obama is meeting Tuesday with taxpayers to discuss  the extension. Last year, most working Americans saw a slight increase in their paychecks because of the payroll tax cut. Critics, however, say that, in the long run, the payroll tax cut does more harm than good.

Obama meets with taxpayers

The president will meet with taxpayers at the White House Tuesday to discuss the benefits the payroll tax cut extension will give them. It is expected that he will also entreat Congress to continue passing legislation designed to  strengthen the middle class.

The payroll Tax cut Act

The Tax Relief, Unemployment Insurance Re-authorization and Job Creation Act of 2010 was granted an extension by Congress last week. As a result, taxpayers can expect to enjoy the same benefits they enjoyed in 2011 for another year at least. The payroll tax cut reduces the amount of Social Security taken out of payroll checks from 6.2 percent to 4.2 percent. According to Daily Finance, that works out to about $1,000 a year for the average American family.

Most Americans unaware of bonus

A recent survey by the National Foundation for Credit Counseling found that 66 percent of taxpayers surveyed were not even aware they were seeing an increase in their paychecks. However, a significant amount of those taxpayers who were aware of the bonus put the extra money aside for savings and debt reduction.

Bonus used for debt relief, savings

The NFCC survey found that 53 percent of those aware of the payroll increase used the savings to pay down debt. For 24 percent, the money was used to pay off old bills. IRA accounts were padded with the bonus by 12 percent. Nine percent used it for savings, and only 3 percent used the extra money to splurge.

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Buy now, pay later, critics say

Some see re-channeling a portion of the money reserved for the future into today’s struggling economy as irresponsible. Terry Savage, a financial columnist for the Chicago Sun-Times, believes that post-baby boomers will see their retirement benefits greatly reduced or taxed away by the time they retire. And further, young people see it coming.

Young people support payroll tax cut

According to Savage, young voters are happy to take some extra money now rather than gamble on dubious returns they may or may not see later.

He wrote:

“We are not fooling anyone among the generation under 50. Of course they’ll be inclined to vote for politicians who give them a ‘payroll tax cut extension.’ It’s paycheck money they can spend now — not unfunded promises for the future… Today’s young people get it.”

Sources

Daily Finance
Boston Globe
Chicago Sun-Times

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