As mentioned here previously, five constellations of policy issues are likely to dominate Washington’s 2011-2012 calendar: health care reform implementation, targeted jobs creation measures, tax policy, retirement security and immigration. Despite the sense of urgency about the looming federal budget deficit, Washington seems to be focusing on tax policy this week.

As of this writing, it looks like President Obama and Congress have agreed on a partial payroll tax holiday for all employees. The overall agreement temporarily to extend Bush-era tax rate cuts includes a 2 percentage point reduction in the employee share of Social Security taxes—i.e., a cut for the year 2011 from 6.2% to 4.2%. The payroll tax cut would, for example, reduce the taxes of an individual earning $50,000 per year by $1,000. This would shoot a big hole in Social Security revenues for 2011, which would have to be made up by transfers of general revenue to the trust fund, but would give a short term boost to disposable income.

Also high on the tax policy agenda for the rest of 2010 and into 2011 are the Bush-era income tax rate cuts. The cuts were enacted as part of the 2001 and 2003 economic stimulus measures and are scheduled to expire at the end of this year. Read more.

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Employer Compliance: Uncertainty Continues… Tax Policy

Tue Dec 7, 2010

As mentioned here previously, five constellations of policy issues are likely to dominate Washington’s 2011-2012 calendar: health care reform implementation, targeted jobs creation measures, tax policy, retirement security and immigration. Despite the sense of urgency about the looming federal budget deficit, Washington seems to be focusing on tax policy this week.

As of this writing, it looks like President Obama and Congress have agreed on a partial payroll tax holiday for all employees. The overall agreement temporarily to extend Bush-era tax rate cuts includes a 2 percentage point reduction in the employee share of Social Security taxes—i.e., a cut for the year 2011 from 6.2% to 4.2%. The payroll tax cut would, for example, reduce the taxes of an individual earning $50,000 per year by $1,000. This would shoot a big hole in Social Security revenues for 2011, which would have to be made up by transfers of general revenue to the trust fund, but would give a short term boost to disposable income.

Also high on the tax policy agenda for the rest of 2010 and into 2011 are the Bush-era income tax rate cuts. The cuts were enacted as part of the 2001 and 2003 economic stimulus measures and are scheduled to expire at the end of this year.

President Bush and the Congress, on a bipartisan basis, engineered legislation that reduced tax rates across-the-board, i.e. 15 percent to 10 percent and 39.6 to 35 percent. At the time, it was thought these tax cuts would jolt the economy — which they did — and that Congress would take another look in 2010, possibly ending some rate cuts depending on the state of the economy.

To be sure, no one in Washington, D.C. advocates allowing all of these rates to revert back to their levels prior to 2001. That would represent a huge across-the-board tax increase. The big political and economic question is, however, should the tax rate applicable to the highest income households remain at 35 percent or return to the previous 39.6 percent rate?

Congress and the president are reportedly close to an agreement on a temporary extension of all the tax rate cuts perhaps coupled with an extension of emergency unemployment insurance benefits. But they must resolve this question soon, somehow balancing the need to avoid raising taxes in a soft economy with concern about U.S. federal budget deficits.

Looking ahead, tax policy, including personal income tax rates and withholding, will be addressed in the larger context of deficit reduction as a whole, including slowing the growth of government spending. On the horizon is a titanic philosophical struggle between Democrats and Republicans over the mix of spending cuts and tax hikes needed to rein in runaway budget deficits. While President Obama and Capitol Hill are not likely to make much progress on deficit reduction in the next two years, they are acutely aware that the public debt crisis clock is ticking and that extraordinary leadership will be required to restore America’s fiscal credibility.