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Middle Class Tax Relief & Job Creation Act Would Extend the Payroll Tax Holiday at a Cost

2 min readBy: David S. Logan

Chairman Dave Camp of the House Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. recently introduced the Middle Class TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Relief & Job Creation Act. The act would extend the current payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. holiday and tackle sundry other reforms.

The 369-page bill includes a handful of main components which are outlined in a Ways and Means press release summarizing the plan. These provisions deal with:

1. Taxes

2. Medicare

3. Unemployment insurance

4. Welfare

5. Health care

6. “Protection of taxpayer dollars”

Though every provision should receive considerable attention form legislators, (1) and (6) are of the most interest to those concerned about changes in tax policy.

The bill would extend the current payroll tax holiday, holding employee payroll tax rates at 4.2 percent (10.4 percent for the self-employed). It would not reduce employers’ payroll tax rates. 100 percent expensing would also be extended for the next calendar year, the goal of which being to free up business resources which can then be used to hire new workers and decrease unemployment.

To protect taxpayer dollars, the bill seeks to prevent fraud and abuse of the Additional Child Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (ACTC) program by requiring individuals to include their Social Security number on their tax return in order to claim the credit. This legislation also incorporates a recommendation from President Obama to prevent Social Security overpayments by improving coordination with State and local governments.

To prevent further erosion of the Social Security Trust Fund, revenue that would have been otherwise collected via a the normal 6.2 percent payroll tax will come out of the Treasury’s general fund. Indeed, most of the bill requires that revenue collected from broadband auctions, for instance, would go to the general fund and earmarked to decrease the national deficit. So to make things clear, the general fund would pay for the payroll tax cut but revenues brought in by other provisions of the bill and exceeding a certain threshold would go to the general fund but be restricted to the use of deficit reduction.

Taking the bill apart in its entirety is difficult, but the Congressional Budget has already scored it. According to the CBO and Joint Committee on Taxation, the passage of the Middle Class Tax Relief & Job Creation Act would result in a $25.3 billion increase in the deficit.

The bill may be the most politically feasible proposal put forth as of yet, but the purpose is really to put together enough elements of compromise to extend the politically popular (and expensive) payroll tax holiday.

Tax holidays increase uncertainty for individuals and businesses. What may be worse in this case, however, is that the holiday has a real chance of becoming a permanent part of the American tax fabric. This “permanent holiday” status will either result in [further] bankrupting the Social Security Trust Fund or eventually forcing legislators to consider real reform to the program itself.

If approved, let us hope that the bill accomplishes the latter.

Follow David S. Logan on Twitter @Loganomix