The fight over the payroll tax cut extension continues in Washington with no solution in sight.
But many are asking a simple question.
Just what are we talking about here?
Luckily in Texas, we have no state income tax.
But that’s about the only break we get, and the array of taxes we pay can be pretty confusing.
But the payroll tax is actually fairly easy to understand.
Now, many people might logically say, but all taxes come out of my payroll check.
That’s true, but there are a couple of different types.
The payroll tax is earmarked for one purpose only, federal social insurance.
That is to say, Social Security and Medicare.
Your employer is required to withhold 6.2% of your salary for Social Security and 1.45% for Medicare.
Your employer then pays the exact same amount on your behalf.
Those levels were set back in the 1980’s under President Reagan.
But even then, Baby Boomer retirements strain the system to the degree that an increase in funding will be needed by roughly 2038.
Last year as part of the jobs bill, President Obama proposed, and Congress eventually passed a 2% reduction in the tax which will add on average $1000 to your yearly income.
That’s $120 billion infused into the economy.
But, since Social Security will not be getting as much, the date by which it runs short of cash is brought nearer.
And additionally, when it’s time to return it to the normal rate, will that be portrayed as a tax increase?
Of course it will…it already is.
And then Congress goes to war all over again.
A House-Senate conference committee decided on a 2-month extension of the tax cut, but now the House wants a year extension, and the fight goes on.