On Stimulating the Economy

How do we get there?

WARNING!  If you are one of my conservative friends this post may make your head explode.  If you are one of my liberal friends - yes, it really is me.

It is apparent that what the economy needs is an increase in job growth and consumer spending.  I don't claim to be an expert on the economy or tax policy but it seems to me that one quick way to get there is through a revision in the FICA tax.  In 2010 Social Security taxes of 6.2% were imposed equally on employees and employers on every dollar earned up to $106,800.  No Social Security taxes are collected on wages above this amount.  For 2011 the rate for employees was temporarily reduced to 4.2%.  This tax is particularly regressive and represents the major tax burden on low wage workers as well as a significant cost to small employers.

A simple solution that has a little something for everyone:

1. Eliminate permanently the Social Security tax for both employees and employers on the first $20,000 of wages.

Eliminating this tax for employees would be a significant reduction in the tax burden on lower income workers.  It would give them additional disposable income that would provide an immediate economic stimulus.  Eliminating it for employers would reduce the cost of labor providing incentive to hire more employees.  Republicans and democrats should both be happy with tax relief, economic stimulus and job creation.

Now the hard part - making up the lost revenue without making everyone crazy.

2. Maintain the current cap of $106,800 but reimpose the Social Security tax on all income above $500,000.  This gap would result in a relatively small tax decrease for most in the middle class; however, workers earning very high salaries and bonuses would be taxed on those.  Employers who provide those extraordinarily high compensation packages would also have an increased tax burden which could provide a disincentive to compensate highly unless there is a genuine reason for it.  Additionally, specifying all income above $500,000 would prevent the very wealthy with high investment income from avoiding this tax.  Republicans and Tea Partiers aren't going to like this very much.  Democrats and Warren Buffet would be very pleased and the Social Security fund would benefit.

I don't pretend to be an economist or even believe much of what I learned in economics.  One of the concepts I do believe in is marginal utility of income.  Clearly 6% of every dollar that a $25,000 administrative assistant earns is a much heavier burden to that person than 6% of Warren Buffet's last $1,000,000 is to him.  The hedge fund manager who gets a $1,000,000 bonus may not like paying that extra 6% but she can afford it.

#justsayin