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You Want Real Stimulus: Payroll Tax Holiday

Last night, President Obama in his State of the Union address alluded to a number tax incentives to stimulate the economy.  A few may work but most will not.

One tax incentive that is still confusing (to me) is this small business jobs tax credit.  If small businesses are not hiring and possibly firing because a lack of demand for product/services then how does a tax credit help.  This tax credit doesn’t help with the demand for the small businesses product/services.  A small business is NOT going to hire people if the demand is not there - it’s that simple.

WE NEED TO STIMULATE DEMAND!  That means putting money in people’s pocket and doing it on a regular basis as opposed to a one time stimulus check gimmick.

A Payroll Tax Holiday will provide a very effective and regular stream of extra of money for families to use on household expenses.

What is a payroll tax:  Each pay period, an employer withholds a certain amount of money from our pay checks.  The withholdings include a certain amount for state and federal income taxes, social security, unemployment tax and medicare.  The social security and medicare tax is known as FICA tax or Federal Insurance Contributions Act tax.  Both employer and employee pay a share of the FICA tax.  Currently, FICA tax rate are the following:

Employee:
6.2% of gross compensation for Social Security portion
1.45% of gross compensation for Medicare portion

Employer:  Same rates

A combined FICA tax rate of 15.3% per pay period.  What happens is that employer takes employees portion of FICA and add its own portion and submits it to the IRS.

Proposal:  A payroll tax holiday on the FICA portion of payroll tax.  The FICA tax rate would be set to zero for employee and employer.  U.S treasury would pay the 15.3% on behalf of the employer and employee into the applicable social security and medicare funds.  This would mean an immediate stimulus, well targeted, simple and can be withdrawn quickly when economy starts to recover.

Payroll tax holiday:

provides nearly $2500 of tax relief per year for each worker, with the same amount of relief going to that worker’s employer. The total stimulus to the economy would be somewhere around $650 billion per year.

Now that’s stimulus!

UPDATE:

How would this compare with other forms of economic stimulus?  Well, according to this chart below pretty well:

H/T to: Openleft - Paul Rosenberg

Source:  “Fixing the Economy”,  Economic Perspectives from Kansas City

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