There’s been talk from the Obama camp that the cap on Social Security taxes ($102,000) should be raised. Or rather that particular cap should stay, and another level should be instituted at $250,000. This would mean that the employee and the employer would each pay 6.2% on all payroll income up to $102,000 (as is the situation now) and, if the employee makes more than $250,000 the employee and the employer would each pay 6.2% on the payroll income over $250,000 as well. Self employed individuals pay both portions of the tax for a total of 12.4%. This does not include the Medicare portion of the “payroll” taxes (there is no cap on the Medicare tax) and these taxes are not “income” taxes. These payroll taxes are also, as indicated by the name, on payroll income only. These taxes are not assessed on capital gains, interest income, dividends, or other forms of income.

Social Security and Medicare taxes are withheld from every paycheck but are not the same as income taxes withheld. Social Security and Medicare taxes do not count towards income tax due as does “withholding”. Also remember that while the “withholding” from your paycheck is a direct transfer from your wages to the IRS (on account against your income taxes), the Social Security and Medicare taxes are “matched” by your employer and are added to the employer’s cost to employee you.

For low wage earners, the Earned Income Credit is available. This can rebate some of the payroll taxes for those wage earners who may not pay income taxes otherwise (due a refund of all or most of the income tax withheld), but the employer is still on the hook for the employer’s portion of the tax.

“Doughnut Hole” chart:

The “doughnut hole” posited by the Obama camp will not increase payroll taxes on those in Congress.

The “doughnut hole” posited by the Obama camp may keep employers from raising salaries above $249,999.99 since the employer will have to pay an additional 6.2% of every dollar over that amount in payroll taxes.

The “doughnut hole” will also act as a brake on small business. For a self employed small business owner, under the “doughnut hole” plan, income from $102,000 to $249,999.99 is the same as it would have been with the current cap in place, but any income $250,000 and up will accrue additional tax liability. Why should a business owner aspire to earn any more than $249,999.99?

To help the “working family” as the Obama camp is purporting to do, how about this for an idea?

Start by dropping the Earned Income Credit. Then drop the Social Security tax on the first $50,000 of payroll and cap it at $249,999.99. Do this for the employee, the employer and the self employed. And credit each earner for whatever portion of the first $50K they have earned.

This will nearly double the pool of taxable payroll than is currently in place ($199,999.99 instead of $101,999.99) and the percentages start at a higher dollar amount ($50,000.01 instead of $0.01).

Reducing the tax liability for lower wage workers is a win-win. The worker gets to keep more money in his/her pocket with each paycheck and the business has money that can be used for raises or hiring more employees or for increasing benefits.

The self employed small business owner saves two ways. There is a smaller tax liability on payroll and a smaller tax liability for the owner personally. Under my plan the small business owner will have a larger liability for income between $50,000 and $249,999.99 – but there is a cap on that liability. The small business owner will pay no more than $24,800 in any one year.

Where Obama’s “capless” after $250K would cost that small business owner $49,848 on income of $550K – an increase of $37,200 over what that small business owner would pay currently, my plan would cap the increase over what is paid currently at $12,152.

Of course this is all only if Obama gets elected and insists on changing the payroll taxes. He would do better to keep Bush’s tax cuts and if he must mess with payroll taxes, he should do something that would actually help the low and middle income earners that the Democrats all say they want to help.

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