The Middle Class Tax Cut Act of 2011 would continue through the end of 2012 a reduction in the payroll tax for workers that was contained in economic stimulus legislation President Obama signed into law in late 2010. The bill would also further cut the payroll tax rate workers pay from 4.2 percent (a 2 percentage-point reduction from the 2010 rate of 6.2 percent) to 3.1 percent. The employer share of the payroll tax would be cut in half, from 6.2 percent to 3.1 percent. The tax would be waived entirely on the first $12.5 million in payroll for newly hired workers -- in the hopes of creating an incentive to spur hiring.
Payroll taxes are used to finance the Social Security trust fund, and the legislation calls for replacing the funds that would have been collected through the payroll tax with general fund revenues. Those revenues would be raised through a 3.25 percent surtax on individuals earning more than $1 million a year that would take effect in 2013.
During Senate debate, Sen. Robert Casey, D-Pa., said, “This Middle Class Tax Cut Act is very simple … Instead of just saying we are going to have a reduction of 2 percent of the payroll tax, this legislation cuts it in half. So you are cutting the payroll tax in half. That is take-home pay, $1,500 in the pockets of the average working family in America. Secondly, it allows us to provide a cut as well for businesses, cutting in half the payroll tax for businesses. It is good public policy. It will create lots of jobs at a time when the American people are telling us, with one voice, they want us to do one thing here: create jobs or create the conditions for job creation so small businesses can hire. At the same time, they want us to come together in a bipartisan way.”
Sen. John Thune, R-S.D., responded in opposition. “There is simply no reason that preventing a tax hike in this bad economy needs to be paid for by raising taxes on the very employers whom we are counting on to help jolt this economy back to life, which is exactly what the Democrats have put forward. … This is a dramatic expansion of this particular provision, which we cannot afford when we already have a $15 trillion debt. There is a right way and wrong way to do this. This is the wrong way in the Democratic proposal.”
The bill failed on a cloture motion, 51-49, with 60 votes required for the legislation to proceed to formal debate and final passage. Voting in favor were 50 Democrats and one Republican; opposed were 45 Republicans, two Democrats and two independents.
The Middle-Class Position:
This is far from ideal legislation, but the consequences for every working American of not passing this legislation would be dire: a cut in each worker’s take-home pay averaging $1,000 and the loss of as many as 400,000 jobs as the impact of smaller paychecks ripples through the economy.
Still, it is important to note that by proposing to expand and extend this tax reduction, Democrats have bypassed more efficient ways to help the economy, and have once again endangered Social Security. Remember that Social Security is a form of insurance, and the payroll tax is actually an insurance premium payment. The premiums have to be paid in full in order for people to get the benefits they signed up for; hence the debate over replacing the lost revenue with either a millionaires’ surtax (as the Democrats have proposed) or with a combination of spending cuts and a five-year freeze on federal worker pay (as the Republicans proposed). Continuing and improving the Make Work Pay tax credit, which gave individual workers a tax credit of up to $400 in 2009 and 2010, would have been a better way to boost worker paychecks.
That said, the Republican approach, which would make a continuation of the payroll tax cut contingent on cutting the size of the federal workforce by 10 percent, would do serious harm to the economy. It would result in roughly 280,000 job losses, according to the Economic Policy Institute, and the proposed wage freeze would in effect mean an 8.3 percent real wage cut for all federal employees over five years.
Given the choice between the highly flawed Democratic proposal and letting the Republicans block it or substitute a policy that would plunge the economy into an even deeper hole than it's in right now, the Middle Class Tax Cut Act is the better middle-class policy. But we expect legislators who want to earn the support of middle-class voters to do much better.
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