Wednesday, February 15, 2012

What did you do with your $40?

There's a big push on right now to save the payroll tax break. If you haven't heard it, you're probably not listening to the TV or radio or getting your news from the internet. Are you living under a rock? The White House is even using their website to encourage people to tell their congressman "what $40 means to you and your family." However, I think the White House  is asking the wrong question, they should be asking "what did you to with your $40?"

See, the tax break is already in place. It has been for over a year now as an attempt to stimulate the economy. All of 2011, you got the tax break, and hopefully were stimulated. Of course, most people weren't stimulated, but it's clear if you look at the tax rates here. The tax break was debated (Ad nauseam) in December and was extended for 2 months. Using the assumptions that got us to $40, you should now have received $160 in tax breaks. What did you do with that? Do you feel stimulated? If you want to read more and are in the mood for a long paper on this stimulus payment (and why this was ineffective), the Federal Reserve Board has written a long white paper at this site.

It turns out most people don't know what they did with the tax break (see here), but a lot of people are ready to give congress low ratings for something they know nothing about. That's why in December, congress reversed itself and extended the cuts. After all, these guys are up for re-election and if the public complains about something, even if it's something the public doesn't understand, congress listens.

So where does the $40 number come from? Well, it's based on the "average" income of $50,000. I've sent emails to a few news organizations that mess up the math and say it's $40 per week, it's actually only $40 every two weeks. And it's actually lower, as it assumes 25 paychecks a year, not 26. I guess if you take two weeks vacation without pay it works out. But if anyone tells you it's $40 per week, ask them if they are making $100,000, because that's what they have to be assuming to make the math work. (the news organizations I've emailed never responded).

The tax break is "fair" - it's evenly distributed among the poor and the wealthy. In fact if you look at a percentage, it's more for the low-income people. For the "average" person making $50,000 it's 2%, for someone making $200,000 it's only about a 1% savings. And for people who don't get a W2 or 1099 for their income (like several of the super-rich candidates), there's no savings at all as a result of this "tax break."

So, before you call your congressman to tell him what you can do with the $40, think about what you did with the $40 tax break you're already receiving. This isn't going to give you an EXTRA $40, it will just leave things the way they are.