I think it’s clear that the politics of this issue are working in favor of President Obama and Democrats, but I’m a lot more interested in the impact that the 2% cut in payroll taxes had on the economy in 2011 and the likely impact of that cut (or lack thereof) in 2012.
Most analysts suggest that the payroll tax cut boosted GDP by about half a point in 2011 (which would be about a quarter or more of the entire growth for the year). Even if many workers didn’t even notice the cut, they had the equivalent of a 2% raise in 2011, which clearly benefited the economy.
I was going to do a long post about this, but that’s about all I have to say — plus there’s this good explanation of what’s at stake for workers in today’s Wall Street Journal, What the Payroll-Tax Stalemate Means for You:
The larger issue is the extension into 2012 of the two-percentage-point reduction in FICA payroll taxes that was in effect during 2011. This benefit reduced the employeeâ€™s portion of the tax to 4.2% from 6.2% of wages, up to a cap of $106,800. Thus the total possible savings per employee was $2,136, or $4,272 for a married couple. The benefit did not affect the uncapped Medicare tax of 1.45% paid both by employer and employer.
In 2011 the employerâ€™s portion of the FICA tax remained 6.2%, up to the same earnings cap. Self-employed workers paid both portions, for a total of 10.4%.
Unless Congress acts, the 2011 reduction will expire at year-end and the employeeâ€™s FICA tax rate will return to 6.2%, although the cap will rise to $110,100 after an inflation adjustment. Result: FICA taxes will rise by up to $2,202 per wage-earner in 2012.