Wallets Could Benefit From Payroll Tax Change

A tentative agreement between the White House and Republicans in Congress would reduce payroll taxes by 2 percentage points in 2011. The possible change would allow employees to keep a little more money in their wallets. For more details, Steve Inskeep talks with NPR's John Ydstie.

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STEVE INSKEEP, host:

We're going to follow up now on some details of a tax deal reached between President Obama and congressional Republicans. We've heard the big headline: President Bush's tax cuts would not expire at the end of this year, so everybody's rates would stay the same, including rates for the wealthiest Americans. Another part of this agreement would actually put additional money in the pockets of every American who pays Social Security taxes. NPR's John Ydstie is here to explain that provision.

John, good morning.

JOHN YDSTIE: Hi, Steve.

INSKEEP: OK. They call it a payroll tax holiday, which sounds festive. What is it?

YDSTIE: Yeah. Well, what they're going to do is cut by two percent the amount of payroll tax paid by workers. You remember that workers pay 6.2 percent of their income, up to $106,800, in for Social Security. Their employer pays about the same amount - or exactly the same amount. And the employers - or the employee's portion is going to be reduced by two percent. So it will mean people will be able to have more money in their pockets.

INSKEEP: I don't want to get too lost in the numbers here. You mentioned two percent. That sounds small, but I was just thinking about the series we did on this program earlier this year about people in the middle of the income range in the United States. The average family - the median family makes about $50,000 per year. That'd be like an extra $1,000 for them.

YDSTIE: They'd have an extra $1,000 in their pocket. If you made $100,000, it would be 2,000. It's capped at $106,000. So you couldn't get more than about $2,100.

INSKEEP: OK. And it's not like you're going to get $1,000 all at once. It'd be over the course of the year. Why is this...

YDSTIE: Right. It's over the course of the year, right.

INSKEEP: Why does this make sense?

YDSTIE: Well, that's one of the reasons, I guess, it makes sense. And that is that you get a bit more money in each one, each of your paychecks. And it's more likely then that you'll spend it than getting $1,000 or $2,000 check in the mail, which you might decide to save. And right now there's still concern that the economy is not growing fast enough. We obviously are not creating enough jobs. We found that out last Friday. And so getting a little bit more money into the pockets of individuals will help.

Now, it's also sort of taking the place of the making-work-pay tax cut that was in the stimulus package that's going away. That was a $400 per worker tax break. And that's going away. So this will replace it.

INSKEEP: Does it really then get more money into the economy?

YDSTIE: Well, you know, that's the question. Are people going to spend the money? Now, it's likely that this will, you know, more likely that this will be spent than a big broad tax cut, because this is aimed at people who make less than $106,000. And middle income workers, lower income workers, tend to spend more of their paychecks, because they just need to to get the basics.

INSKEEP: John, one quick question here. We're talking about reducing Social Security taxes. Isn't there a long term problem with Social Security having too little money?

YDSTIE: Well, absolutely true. And we've heard a lot about the deficit commission recently and their efforts to try to fix Social Security and either raise the payroll tax or cut some benefits. And there are a lot of plans out there to do that. This will certainly be a hit to Social Security. There's no -they're not talking about trying to make it up later. It'll - essentially the government will have to borrow to replace this. So this will become part of the problem.

INSKEEP: OK. John, thanks very much.

YDSTIE: You're welcome, Steve.

INSKEEP: That's NPR's John Ydstie with details of a tax deal involving President Obama and congressional Republicans.

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