RebelCapitalist: Financial Information for the Rest of Us

Why go half away?

Sep 03, 2010 | By: Mr_Blue | Comments | Permalink | Tags: obama, payroll tax holiday, fica tax

Obama Administration is floating the idea of a payroll tax holiday in the press. But get this - it will be for employers only and apply only to NEW hires. This does very little to address the huge jobs hole we have now. Our current economic situation requires a bold response and it seems, with this idea, Obama Administration will fail to deliver again.

Payroll tax - aka - FICA Tax or the Federal Insurance Contribution Tax - is a tax that is assessed against our gross paycheck amounts. The current rate is 15.30% - 7.65% paid by employer and 7.65% paid by worker. The tax collected goes into the Social Security Trust Fund and Medicare Trust Fund.

Obama Administration is floating this idea of payroll tax (temporary) holiday as a way to stimulate the economy (but don’t mention the word ‘stimulus’ - the Administration doesn’t like the word now). Early indications are that this payroll tax holiday will only apply to employers tax obligation and apply only to new workers. If this is the case, this will be another weak policy proposal.

Businesses are not hiring because there is no current demand for product and services and they don’t have confidence that there will be future demand for product and services. Giving a payroll tax to employers for new hires only does very little to address this problem. We need policies to address the lack of demand issue that businesses face.

A correct payroll tax holiday would be for both the employer and CURRENT workers and new workers. This would provide huge stimulus to economy. This type of payroll tax holiday is putting cash in people’s pockets immediately - every pay period - and businesses get a tax savings every pay period that could be invested in new workers or equipment.

Many people, including Prof. Jaime Galbraith and Warren Mosler, have been proposing a FULL payroll tax holiday for a while now. Obama Administration should be open to listening to people who have been warning since 2009 that its stimulus policy was not strong enough. It would do everyone some good if they listened.

Now, there are those who are worried that this could hurt Social Security Trust Fund. I can’t speak for the Obama Administration’s potential proposal but Galbraith’s and Mosler’s proposal would require the Treasury Department to credit the Trust Fund in the amount of payroll tax lost by holiday. This is something that Treasury Department is use to doing.

Good luck.