A PAY CUT OR NOT A PAY CUT, THAT IS THE QUESTION

I recently wrote a piece for www.TheStreet.com about the expiration of the 2% payroll tax “holiday” titled “Everyone Got a 2% Cut In Pay”.  A reader commented –

“’So starting Jan. 1, everyone got a 2% cut in pay!’  WRONG, wrong, wrong!!!  The rate went back to what it had been for YEARS.”

We are both right.

Beginning with the first paycheck issued in 2013, all employees had 2% more withheld for the Social Security component of FICA tax.  So everyone’s pay was reduced by 2% - a 2% pay cut.

But this was NOT a tax increase.  As the comment writer correctly pointed out, the employee’s share of FICA tax merely went back to the way it had been for many, many years prior to the enactment of this temporary tax benefit.

The 2% payroll tax cut was a temporary measure that applied to 2011 and 2012 only.  It was a political gimmick.  As I pointed out in my piece, it was the latest reincarnation of the rebate check political gimmick that was implemented during the Dubya years.

The rebate check/credit became the Making Work Pay Credit under BO, which was replaced by this 2% payroll tax holiday. 

The rebate check caused more problems than it was worth (as I observed here at the time – “These checks cost the IRS a fortune, created tons of confusion, and resulted in millions of errors on 2008 tax returns! And it is doubtful that they did anything to stimulate the economy.”) and the Making Work Pay Credit FU-ed withholding.  As a method of distribution, the payroll tax holiday was “more better” (i.e. caused less administrative problems) than its predecessors.  But it was a political gimmick all the same.

The original rebate check, like New Jersey’s original homestead rebate checks, was a way to buy votes.  Originally the NJ homestead rebate check went out on November 1st.  The hope was that taxpayers would say, “Look what the Democrats just gave me” and run out on Election Day and vote for all the Democratic candidates.  Prior to the issuance of the federal rebate checks taxpayers often received a letter from their representative idiot in Congress telling them that the check was coming.  “Look what the Republicans just gave me.  I will thank them by voting Republican!”

This 2% payroll tax holiday is a great example of the danger of “temporary” tax benefits.  Taxpayers get used to them, and when they expire it appears that there has been a tax increase.  It never should have been passed in the first place.  It never should have been extended for 2012.  And the idiots in Congress were right not to extend it for 2013. 

TTFN