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Is Payroll Tax Reduction a Good Idea?

Posted on September 14, 2011 by Leasa Magnuson in Business Tax, Individual Tax

On September 8, 2011 President Obama presented his proposals for boosting the economy. I confess I did not listen to his speech but have read bits and pieces of it and what jumps out at me is the reduction in payroll taxes. Earlier this year I blogged about employee’s having to pay 2% less in Social Security tax for 2011. President Obama proposes that we extend this “payroll tax holiday” for employees and expand on it giving employers a payroll tax holiday as well. He is proposing that Social Security tax be cut in half for employers on the first $5 million in wages.

If I understand this right the employee would have 4.2% tax withheld on his taxable wages for Social Security and the company would pay 3.1% Social Security tax on the employee’s taxable wages. Doesn’t that reduce the total amount going into the Social Security fund by 5.1%? If the employee used to pay 6.2% and the employer used to pay 6.2% then a total of 12.4% of the employee’s wages went into the bucket for retirement. And now if 4.2% is paid by the employee and 3.1% is paid by the company then only 7.3% is going into the bucket for retirement. So I am pretty sure that reduces the funds going into the Social Security bucket by 5.1%. Now the last time I looked there was some concern about the funds in the Social Security bucket being able to handle the large influx of retirees as those in the baby boomer generation retired. In fact most 30 year olds joke that Social Security won’t be around when it is their turn to retire. Doesn’t reducing the amount going into the Social Security bucket speed the process up for when Social Security runs out?

I’m not sure that lowering taxes to the detriment of a social program like Social Security is a good idea in the long run; maybe employees would rather have the 12.4% put into the Social Security bucket to aid them when they are of retirement age.

Payroll Taxes, Social Security Tax

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