Thursday, December 9, 2010

Fiscal Stimulus $2.00 at a time...Is reducing the Payroll Tax enough to "prime the pump"?

     One of the key components of the latest stimulus deal the President and the Republicans in Congress have hammered out is a decrease in the Social Security part of mandatory payroll taxes that just about everyone pays. The other part of the mandatory payroll tax is Medicare, but that is staying the same at 1.45%.   Currently 6.2% is taken out of paychecks and goes to the Social Security Trust fund to be distributed to "old" people in the form of a monthly check.  The compromise reduces this amount with-held by 2 percentage points, down to 4.2%.  For example: at 6.2% every $100.00 a worker earns he/she pays $6.20 in Social Securtiy taxes.  If the compromise becomes law, then only $4.20 will be with-held.  Soooo, a worker will retain $2.00 more for every $100.00 earned.  If a worker makes $500.00  a week, then their check will increase by $10.00.  The assumption is this money will be spent on goods and services and will stimulate the economy.
     There are two ways of looking at this. (1) The amount is so small for each person the stimulus will not be sufficient.  After all, what can you buy with $10.00 additional dollars per week that will make a significant difference? (2) Although the amount is small, there will be no debate about saving it or using it to pay debt. People will fully spend this extra money and the economy will get the maximum impact of the whole amount being spent, rather than just a portion. 
     I am not really sure what to think, so I ask you...is this "good or bad" stimulus?  Extra credit on the next test awaits!
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