A small business owner friend of mine has some thoughts on the 2% payroll tax cut that I would like to share.

SBO writes …

Hello Mish
Here’s a quick note on the 2% payroll tax cut. We own a couple of small companies, each with under 200 employees. We provide health insurance to our employees, but they share the cost. We pay $300 per month per individual, and any cost above that (including cost increases) are shared 50-50. Our average salary is about $42,000. The 2% payroll tax cut will be about $70/month for the average person.

However, our health insurance cost increased by $117 per month for individuals (more for families) and that was only after altering the benefits, shopping intensively, and changing providers.

Thus, the same average employee will pay an additional $58.50/month for increased health care costs. The net additional dollars to the employee will be $11.50/month. So, spending another $70/month will all be a boost to GDP, since spending on health care is deemed consumer spending but I don’t think my employees are going to feel any richer.

This adds to what I said in Jobs Forecast 2011 Calculated Risk vs. Mish (correcting a couple of awkward sentences).

OK there is going to be more money in paychecks because of a reduction in Social Security collection. In response, I see ever increasing estimates as to how much that payroll tax cut will add to GDP.

However, I have to ask “How much of that payroll tax cut will go to increased sales taxes, state income taxes, and property taxes?”

I have not seen anyone properly address that question. I suggest we need that payroll tax cut to break even. Certainly taxes of all kinds are going up in Illinois. Our idiotic governor wants to hike income taxes 33%. Sales taxes will likely go up as well.

While Illinois may be an extreme example, bear in mind that places where taxes are not going up will see more layoffs.

SBO adds another aspect I did not even consider. Some employees who share medical costs with their employer will have the payroll tax cut completely eaten up before they see a penny of it. The payroll tax cut will not be there to spend, it will have already been spent. That applies even more so to the self-insured.

Then there are property taxes, state income taxes, and sales tax increases to consider (or additional cutbacks in states that do not raise taxes). GDP may get a small boost from this in theory, but the overall net effect will be a decrease in jobs and the average taxpayer will not see a dime of the decrease.


Here is a a reader email from David who lives in North Carolina regarding the above post.

Hi Mish,

Just read the article and thought I would offer my two cents (maybe a dollar after you finish this!) on the payroll tax cut.

I am the sole employee of my S Corp, so I am self employed. The 2% FICA cut is worth about $155 a month to me. I got my annual letter from Blue Cross stating my new rate for Health Insurance. It goes up $154 a month, so I net out $1 per month. I if see you in North Carolina maybe we can share a cup of coffee if we can find a cup for $1.

I read you blog every day along with several others I deem worthy. Really enjoy it. I am floored by stories of the public unions and pensions in other states and click on the links to read the full story. NC has no public unions, virtually no private unions, and a pension system that is solvent NC public pensions are not extravagant. These stories are unheard of in NC, not that we don’t have a few of other types to tell. Our corruption is a little different.

NC is facing a 20% (3.7 billion about) hole in the state budget next year. The politicians are stating they will close it without raising taxes or borrowing, but I am waiting to see what they do. There is no way to close the budget without cutting the state payroll. Most State employees have gone without pay increases for the last two years. I suspect a number of them will be laid off unless the idea of pay cuts I am starting to hear discussed is real. The precedent is there, NC cut pay in the Great Depression to close a similar gap without cutting employees / services.

Chapel Hill NC

Mike “Mish” Shedlock
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