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President Obama Wants to Give Me $75k

President Obama’s new tax proposals would cut the payroll taxes on small businesses for the next one or two years in order that these enterprises increase employment. I am glad that the President wants to do this, but I can’t for the life of me figure out why he thinks many jobs will be created from the proposed tax rate changes.

As a matter of background, both the federal and state governments levy taxes on corporate payrolls. You might ask why the government taxes wages — taxes being a disincentive and all that — which has the immediate effect of reducing employment by making goods and services produced in this country more expensive compared to countries that don’t tax wages, but let’s leave that good question for another day.

Below is a wage report. As you can see from the circled items, governments oblige employers to pay various taxes on each dollar of employee wage payments (employees pay similar taxes, too):

Payroll Tax1.jpg

An employer pays five different taxes on employees wages:

● Employer OASDI [Social Security]: 6.2%

● Employer Medicare: 1.45%

● Employer FUI [Federal Unemployment Insurance]: 0.6%

● NH Employer SUI [State Unemployment Insurance]: 2.8%

● NH Admin Contribution: 0.2%

Total: 11.25%

The item that concerns the President (and me) is the first one: Employer OASDI, a 6.2% tax on salaries up to $106,800 (highlighted in yellow above). This tax funds the social security system. President Obama’s idea is to reduce this tax for a limited time period by 3%, from 6.2% to 3.2%. Such a reduction would save my business in Lebanon about $75,000 per year.

Not bad money, but would the measure serve to create many jobs?

I can’t conceivably see how. Hiring occurs based on an increase in demand, or an expectation of increased demand. How does the President’s idea get us there?

For me, this type of windfall is similar to, say, a drop in the cost of propane. It is nice to see a savings, but I can’t count on it lasting for very long. Besides, if I had any potential profit-earning projects in mind, I’d do them for their own sake, not because the President gave me a little bonus for a year or two.

Perhaps a business that is just scraping along with not an extra nickel of cash to spare, or with no available credit, would appreciate the extra flexibility — but I can’t see that this description applies to more than a small percentage of American businesses. Why give money to all business in the hopes of affecting just a few in the short term? The President might as well have Secretary Geithner drop bales of money from helicopters hovering over office parks for all the good that this program will do.

What would I do with the extra money? I could pay down some debt. Or buy some gifts for friends and family, or some luxury items. Or even invest money in the stock market. But create jobs in the next year or two? I can’t see that this tax reduction would make any difference to my business.

Addendum: Of course, if I don’t spend the $75,000 on some business project, and if I just keep it as profit, then the government will tax it at about $35%, so in truth my final take on President Obama’s $75,000 windfall would only be around $49,000.

Addendum: Herman Cain’s 9-9-9 proposal seems to want to end payroll taxes for both employers and for employees. In the image above, beyond what employers pay, employees themselves usually pay a a 6.2% tax on salaries up to $106,800 — though that tax has been temporarily reduced to 4.2% — plus anther 1.45% for Medicare.

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