Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
The holiday season has just begun, but Congress might have already settled on your gift: a return to higher payroll taxes, starting Jan. 1, 2012.
The payroll tax funds Social Security and Medicare. You may recognize it from your pay stub as FICA (Federal Insurance Contributions Act). The payroll tax is normally 12.4 percent of your gross pay. You pay half (6.2 percent) and your employer pays the other half. The tax is charged on every dollar of salary or wages up to a maximum of $106,800 per year.
But at the end of 2010, Congress enacted a 2 percent payroll tax reduction for employees as part of a larger compromise to extend the Bush-era tax cuts. That reduction expires on Dec. 31, and unless Congress reconvenes and changes something, your paycheck could be 2 percent smaller in 2012. If you make $50,000, you will keep $1,000 less in 2012 than you did this year.
According to estimates, the impending 2 percent reduction in take-home pay will cost the average American family close to $83 per month. That’s a week’s worth of groceries, or nearly two tanks of gas for the car.
Plus, the loss of this temporary tax cut will take money out of the consumer’s pocket, causing people to spend less, and companies to sell and earn less. That’s a headwind for job growth and corporate profits. This could cause more problems for the stock market and your 401(k). I estimate that over the next two years, the return of the 12.4 payroll tax will cost the economy more than $140 billion. That could shave nearly 0.75 percent off our gross domestic product (GDP) each year.
On the flip side, Social Security is already in trouble, with some experts saying the system could run out of money in 25 to 30 years. Permanently reducing employee contributions to Social Security certainly won’t help solve that problem.
I’m all for tax cuts and breaks. But the federal government is in serious financial trouble. Minor tweaks and changes aren’t going to solve the problem. We need leaders to who can offer and implement a strategic vision. Leaders who can make Washington — and the American people –- understand that certainty and clarity on tax and fiscal policy are absolutely crucial to getting the economy and government back on track. Ideally, that vision would include a simplified tax code that would remain stable for at least the next decade.
For us to turn this thing around for the long-term, just about everyone, regardless of political affiliation or economic status, is going to have to bear some of the burden, whether it’s higher taxes, lower government benefits or reductions in favorite programs. Any leader hoping to sell a real solution in the current divided political environment will have to be the next Winston Churchill.
Remember, it was Churchill, who, immediately upon being named Prime Minister, told the British people all he could offer them in the face of looming disaster was “blood, sweat and tears.”
Do you think we have that leader waiting in the wings? Let’s pray we do.
– By Wes Moss, for Atlanta Bargain Hunter