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US Politicians Squabble Around Funding For Payroll Tax Cuts

by Mike Godfrey,, Washington

05 December 2011

While both United States Democrat and Republican Parties have expressed a willingness to extend, and even increase, the payroll tax cut which will otherwise expire at the end of this year, they are poles apart on how the consequent reduction in federal revenues should be funded.

With his American Jobs Act currently stalled in Congress, President Barack Obama is proposing not only an extension for a further year of the existing payroll tax cut from 6.2% to 4.2%, but also a reduction in the tax to 3.1% for the first USD5m of a firm’s payroll, and a payroll tax holiday for firms that increase their payroll by adding new workers, with a cap at the first USD50m in payroll increases.

It has been estimated that a one-year extension of the current 4.2% rate would probably cost some USD120bn, but a full application of the President’s proposals would take a total of more than USD250bn out of federal tax revenues.

Subsequently, the Democrat-controlled Senate released a bill, entitled the ‘Middle Class Tax Cut Act of 2011’, which would enact all of the President’s proposals. Under that bill, however, the payroll tax breaks would be funded by a “surtax on millionaires” - a move unlikely ever to be acceptable to the Republican party, as it would always consider such a move as an attack on small business owners that would reduce investment.

Under the Democrat proposal, a rate of 3.25% would be levied on all individuals with an income, from 2012 onwards, of USD1m. In addition, after 2013, the surtax would be adjusted for inflation.

In the event, the bill achieved a 51-49 majority vote in the Senate, but below the 60 votes needed for its passage forward; and, then, a Republican counter-offer to extend only the existing payroll tax cuts, funded partly by a freeze on federal workers' pay until 2015, was also heavily defeated.

In addition to the pay freeze, it would also reduce the federal workforce gradually by 10%, by only hiring one replacement for every three federal employees who leave federal service; and eliminate millionaires’ eligibility for unemployment compensation and food stamps, and require them to pay higher Medicare premiums. It would also include a “voluntary” version of the 'Buffett Rule', by allowing “taxpayers who feel they are not taxed enough to donate any amount of money to the US Treasury on their tax returns for the purpose of paying down the national debt.”

The White House has attacked the Republican position by pointing out under the Democrat proposal “300,000 taxpayers, the most fortunate among us, would be asked to pay a little bit more so that 160m Americans would get a tax cut,” and, in a comment that describes the divide between the two parties, President Obama said that “to pay for this tax cut, we need to ask wealthy Americans to pay their fair share”.

The Senate Republican Leader Mitch McConnell (R – Kentucky) countered that his party’s solution would “provide some relief to struggling workers who continue to need it but without raising taxes on job creators, which is what the Democrats’ proposal would do.” He added that “there’s also no reason we should pay for that relief by raising taxes on the very employers we’re counting on to help jolt this economy back to life. We wouldn’t be helping anybody by making it less likely that small businesses actually start hiring people again.”

TAGS: individuals | tax | small business | business | tax incentives | law | employees | payroll | legislation | tax rates | United States | tax breaks | individual income tax

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