Inside the payroll tax holiday and just how to have a content one

The Bush tax cut package features a payroll tax holiday that gives most working Americans a two percent increase. Legislators regard a payroll tax holiday as a way to stimulate the economic climate. The idea is that customers will invest the extra earnings. But some economists say that customers will probably save more of that cash than the politicians hope. If all should go as prepared, individuals really should never need to acquire a personal loans. Source of article – Inside the payroll tax holiday and how to have a happy one by MoneyBlogNewz.

Payroll tax holiday: economic stimulus?

The employees' share of income tax will go from 5.2 % to 4.2 % if the payroll tax holiday proposal goes through. This is only up to $106,000 though. Firms like Deutche Bank revised the predictions for 2011 from 3.3 percent to 4.1 percent with economic growth after the tax deal had been announced. This is the math behind it all:

Wages and salaries in the U.S. in 2010 total $6.44 trillion. That figure grew nearly 5 percent in the second and third quarter. If that rate continues, wages and salaries will total about $6.75 trillion a year from now. Deutche Bank estimates about 85 % of total wages and salaries are dinged by the payroll tax. A 2 % reduction in that tax puts $115 billion back in workers’ wallets. Based on the current personal savings rate of 5.8 percent, $108 billion — 0.7 % of estimated 2011 GDP — would be spent. Therefore, 3.3 + 0.7 = 4.1 percent.

The Permanent Income Hypothesis

Deutche Bank is very optimistic according to some. John Carney at CNBC writes the payroll tax holiday won’t increase spending nearly that much because informed consumers will realize their 2 % raise is only temporary. The Permanent Income Hypothesis is the name of this. Future earnings are what people spend depending off of. Current take-home pay doesn't do that. Most people didn't conserve anything and would always spend more than earned before the financial crisis. Then things changed. It had been for the worse too. More is saved now while people aren't spending nearly as much. This is because nobody has an expectation for the future.

How to use your payroll tax holiday

What should you do with that payroll tax holiday raise? SmartMoney says that it is a good idea to put that 2 % of extra cash into a 401(k), a traditional IRA or a Roth IRA rather than just spending. When the payroll tax holiday is over in 2012, you'll be able to make those after-tax dollars worth something. You may end up just paying for the health care costs that are expected to rise next year. Another suggestion is to spend it — on new appliances that can conserve hundreds of dollars on energy within the coming years.

Citations

SmartMoney

smartmoney.com/personal-finance/taxes/what-to-do-with-a-payroll-tax-cut/#ixzz17WrUvmtU

CNBC

cnbc.com/id/40553481

Business Insider

businessinsider.com/deutsche-bank-explains-why-the-payroll-tax-holiday-is-a-game-changer-and-could-push-gdp-to-41-2010-12