Obama’s 2% payroll tax cut

Most presidents when decided to cut taxes would cut regular income taxes. Not President Obama.

In 2009, Obama decided to cut social security taxes by 2%, citing that people needed to get the effect of the tax cut right away—as in the next paycheck.

What are the effects of this tax cut?

First, social security taxes are shared equally by employees and employers, each side paying 6.2%. With this tax cut, employee’s rate has been lowered to 4.2% while employer’s rate stayed at 6.2%.

Let’s work through an example of a worker, John Doe.

John Doe makes 2000 every paycheck. Let’s assume that his federal income tax rate is 10% and pretend that he does not have any deductions except for Social Security Tax and Federal Income Tax.

Without the 2% social security tax cut:

John’s gross pay:                                  $2000.00

Social Security Tax (6.2%)                    –  124.00   (1)

John’s pay after SST                             $1876.00

Federal Income Tax (10%)                    –  187.60   (2)

John’s net pay                                      $1688.40   (3)

With the 2% social security tax cut (i.e. he pays 4.2% of Social Security Tax now):

John’s gross pay:                                  $2000.00

Social Security Tax (4.2%)                    –    84.00   (1)

John’s pay after SST                             $1916.00

Federal Income Tax (10%)                    –  191.60   (2)

John’s net pay                                      $1724.40   (3)

(1)   Social Security Tax: Social Security Taxes that we pay go to Social Security Trust Fund. In this example, this Trust Fund just loses $40 per paycheck from John Doe due to Obama’s tax cut. It is estimated that the amount that the trust fund will lose in 2012 is about $120 billion, on top of a loss of about $105 billion in 2011. In the four years, 2009-2012, the estimated loss to the trust fund is over $400 billion. This trust fund is already expected to go bankrupt in 2037 with people paying a full tax rate of 6.2%. What do you think will happen to it now with Obama’s tax cut?

(2)   Why do you think Obama decided to cut SST by 2% and not the federal income tax? Look at this example, by cutting John Doe’s SST, Obama has more income after SST from John to tax. Thus, in the end Obama has $4.00 ($191.60 – $187.60) more from John Doe to spend. In reality, the amount of loss to the trust fund will approximately be the additional amount that the Federal has to tax, thus bringing more money for Obama to spend.

(3)   In our example, John Doe takes home a net of $36 more. This amount coincidentally almost matches with the $40 per paycheck that Obama has touted that we needed to have. “To everyone who went online last December and told us what it would be like to lose $40 in every paycheck, you should know that you made all the difference. Your voices changed the debate and reminded Washington what was at stake,” Obama says in the new video. “Well, once again, I need you. We all need you to speak out because if Congress fails to act soon, then taxes on the middle class will go up. So use the #40dollars hash-tag on Twitter or head to whitehouse.gov, and tell everyone what $40 means to you.

Don’t get me wrong, I need this $40 per paycheck as much as anyone—but not at the expense of the Social Security Trust Fund.

Ch3 Nguyen

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