Gasoline for the Economy

Ever see gasoline thrown on an open fire?  Impressive!  The economy, like a campfire of burning embers with occasional flickers of flame, just got a dose of gasoline. The recently-passed tax bill (extension of the "Bush Tax Cuts") is more than just an extension. It also includes a little-reported provision by which Social Security (FICA) taxes are rolled back by 2% for one year, beginning January 1, 2011. Actually, I don't understand the lack of press attention to this landmark tax cut. 

Perhaps it's because the press doesn't get it. I'm no economist, but the potentially explosive effect of a 2% net raise in the paychecks of 99% of American workers is, I believe, going to be stunning. This is the largest net tax cut of the last 2 decades. Let's remember what FICA is. It's a flat tax that everyone on every payroll in America pays, from the first dollar of income. It's based on total compensation -- salaries, bonuses, commissions, etc.  Income tax cuts, on the other hand, only affect about 1/2 of US households -- the other half don't pay income taxes at all. 

It's true that FICA phases out at $110,700 of wages per person, so someone earning more than that individually gets only a $2,200 instantaneous net annual raise. Only? One blogger stated, "A 2% cut in the employee portion of FICA really isn't a big deal." A 2% instantaneous raise for everyone in America -- from minimum wage on up? Not a big deal??

Think about it. If every employer in America suddenly conspired to raise every wage in the company by 2% it would be reported galactically, and we'd expect an explosion in consumer spending due to the additional disposable income. The magical part about this, unlike an ordinary income tax cut, is that it's in the first paycheck of 2011 and every paycheck thereafter for a year.

This will have a remarkable effect on the economy in 2011. If your business, personal or investing plans for 2011 were not contemplating significant economic growth, think again. Paydown of consumer debt has been a drag of roughly 1% on the GDP for 2 years running. That paydown rate is beginning to flatten, as consumer debt has reached historical norms.

This additional 2% of gross wages in every pay envelope in America will be like gasoline on a smoldering economy. If they had this card up their sleeves in Washington, I wish they'd played it 2 years ago. That would have worked far better than the indirect and oddly-distributed "stimulus" strategies. Granted, it would have been nice if the employer's share of FICA was rolled back by 2% as well, but not nearly so instantly stimulative.

Hold onto your hat for 2011.

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Terry Weaver


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