Implications of the Expiration of the Payroll Tax Holiday

Frequent guest poster Noreen checks in with a commentary on the implications of the removal of the Payroll Tax holiday and American taxation in general.  I have to say, that I am NOT excited about seeing this expire.  I would actually prefer to keep the 4.8% rate as it is, but remove the cap so that every dollar is taxed, not just every dollar up to the first $106,800.  The cap seems regressive to me.

Americans are struggling with the thought that their government has not only taken a holiday but moved away from fiscal reality. You would be hard pressed to find an American, concerned about the economy, who hasn’t heard about the so-called fiscal cliff. It would be difficult to ignore all the brouhaha being spewed on nearly every news media source about the disaster that will befall Americans, if the government allows the so-called payroll tax holiday to expire.

You can find a commentary to agree with any number of wild projections. What we know for sure is that on average American workers will see a reduction in take-home pay of approximately $1,050 annually; extended unemployment compensation that currently kicks in when state benefits run out will be drastically cut and other services for the middle class and low-income families will be slashed.

The tax holiday was established by the federal government in hopes of stimulating the economy by giving Americans a tax break via a reduction in FICA withholding. Taxpayer relief doesn’t affect government coffers because it’s actually a reduction of deposits into the Social Security fund from 6.2% down to 4.2%. According to the Pew Research Center, the median American income was $50,054 in 2011. Using that figure to calculate the savings, the average American saw $1,001 in withholding reductions. Higher income earners paid the most into the system, so save the most, as well. With Social Security withholding capped at $106,800, Americans who earn more can save up to $2,136.

Congressional representatives of both parties are divided by ideology about the purpose of government, which is translating into a political game of chicken that needs to be resolved. In a nut shell, both sides defend their actions as being in the best interest of the middle class. To that end, Republicans have a mandate to maintain current tax rates to avoid another recession; while Democrats argue for the necessity of raising taxes on the wealthy or as they like to remind us ‘to pay their fair share’.

Some reports claim that both parties are quietly supporting the expiration of the holiday; others report mounting support, especially among Democrats, to extend it. By allowing the holiday to lapse, lawmakers will be able to shore up the Social Security program.

The political fallout will be interesting to watch, if the tax holiday expires. American workers will see an increase in government withholding from their paychecks, which may be reinterpreted as a tax increase. Many people will fail to realize that it was simply a political shell game that took money from a nearly insolvent Social Security system to pay for immediate relief.
Regardless of what happens in the next four weeks, taxes will go up for everyone — not just the wealthy. If the payroll tax holiday is rescinded and unemployment continues to hover around 8%, the working class will continue to struggle unless other forms of relief are realized.

Real and long-lasting economic growth isn’t going to happen until partisan loyalty is replaced by cooperation. Getting government spending under control and debt reined in is an absolute necessity, if the next generation is able to pursue the same opportunities that America has always offered to its citizens. If that means cuts that require tightened purse strings for today’s Americans, then so be it.

A staff writer at, Noreen Ruth is a regular contributor to a wide variety of financial-related blogs and websites. She specializes in credit and debt-related issues and enjoys educating consumers about the latest financial issues. Click here for additional help choosing the right credit cards and building credit. Follow her regular posts on at the Credit Card Blog to stay up-to-date with the latest credit card news, reviews, information and more.

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