In our Flashcard series, The Atlantic aims to decode the concepts and terms readers encounter every day but seldom see explained. Today's installment: the big payroll tax cut plan in the president's compromise with Republicans.
The president's compromise with Republicans on the Bush tax cuts goes like this. In exchange for keeping taxes low on the highest earners, the White House agreed to a two-year extension of the entire Bush tax cut plus its own signature stimulus, which includes 13 months of unemployment benefits and tax credits for both working families and businesses. The biggest part of the new deal is a one-year $120 billion payroll tax cut. What will that do, exactly, and is it a good idea?
Every year, you pay 6.2 percent of your wages to Social Security, and your employer pays the same. That's the payroll tax. In Obama's plan, next year you would only pay a 4.2 percent tax on your wages. That's the payroll tax cut. This small change can amount to big savings. If you make $50,000 a year, a 2% cut saves you $1,000. The White House hopes we'll spend that extra cash, increase aggregate demand, and create jobs.
This is a decisively middle class tax cut. Workers with lower salaries get a smaller tax break for the simple reason that they pay taxes on a smaller chunk of income. Workers with high salaries don't pay the Social Security above $106,800, so they also won't get a payroll tax cut on all of that higher income. Rather this particular provision especially benefits middle- and upper-middle income workers who see the tax break hit all of their income.