What will happen to the 2 percent payroll tax holiday when it expires at the end of this year? Enacted last December the special tax break, which cut workers’ Social Security taxes from 6.2% to 4.2% for 2011 only, will save the average worker some $1,000 in payroll taxes up to a maximum tax cut of $2,136.

The question of its future came up recently in the context of Capitol Hill negotiations on a plan to reduce the federal government’s mammoth present and future budget deficits. The White House signaled that that it would like to see the payroll tax holiday extended through 2012 and possibly expanded to include employers.

Why would the White House be interested in extending the payroll tax cut, which would add up to $111 billion to the federal budget deficit, in the context of negotiations to reduce the deficit?

Because the economy has thrown a monkey wrench into budget deficit reduction talks. To be sure, if nothing is done to cut the deficit, the government’s red ink will hemorrhage by another $9 trillion over the next ten years, on top of the present public debt ceiling of $14 trillion. With a projected deficit this year of $1.4 trillion, Uncle Sam already borrows about 40 cents of every dollar it spends. Read more.

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Payroll Tax Holiday: End it? Extend it? Expand it?

Fri Jul 1, 2011

What will happen to the 2 percent payroll tax holiday when it expires at the end of this year? Enacted last December the special tax break, which cut workers’ Social Security taxes from 6.2% to 4.2% for 2011 only, will save the average worker some $1,000 in payroll taxes up to a maximum tax cut of $2,136.

The question of its future came up recently in the context of Capitol Hill negotiations on a plan to reduce the federal government’s mammoth present and future budget deficits. The White House signaled that that it would like to see the payroll tax holiday extended through 2012 and possibly expanded to include employers.

Why would the White House be interested in extending the payroll tax cut, which would add up to $111 billion to the federal budget deficit, in the context of negotiations to reduce the deficit?

Because the economy has thrown a monkey wrench into budget deficit reduction talks. To be sure, if nothing is done to cut the deficit, the government’s red ink will hemorrhage by another $9 trillion over the next ten years, on top of the present public debt ceiling of $14 trillion. With a projected deficit this year of $1.4 trillion, Uncle Sam already borrows about 40 cents of every dollar it spends.

Without question, Congress and the President must agree on a deficit reduction plan by August 2, not only to avoid a potentially catastrophic default but to put Washington’s finances on a sustainable longer term trajectory. Any credible plan would need at a minimum to cut $2 trillion and perhaps as much as $4 trillion from the 10-year projected budget deficit.

At the same time, disappointing economic data from the Bureau of Labor Statistics putting the unemployment rate back over 9%, with some 14 million people still unemployed (it’s estimated that about 24 million Americans are unemployed or underemployed), and from the Federal Reserve ratcheting down GDP growth forecasts to below 3% for 2011, have caught the attention of budget negotiators.

For that reason there is growing interest in including in any longer-term deficit reduction package a shorter-term jobs-booster such as extending or even expanding last year’s Social Security tax holiday.

It’s not clear at this point whether a consensus can be found to include job-creating tax cuts, which could add $100 billion to the short-term budget deficit, in the final deficit reduction package. It’s not even clear that negotiators can reach agreement on the package itself.

Nevertheless, one cannot dismiss the urgency both to slash America’s colossal budget deficit and to do something about anemic economic growth and widespread joblessness. Don’t be surprised if Congress and the White House agree to combine the bitter medicine of draconian deficit reduction with the sweetener of an extension and possible expansion of the payroll tax holiday.