Obama jobs plan: a tax cut for you?

Obama jobs plan would help employed Americans as well as the unemployed. Tax cuts under the Obama jobs plan could put an extra $300 or more in workers' pockets next year.

By , Business editor

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    President Obama addresses a joint session of Congress regarding jobs at the Capitol in Washington Sept. 8, 2011, as Vice President Joe Biden (left) and House Speaker John Boehner look on. The Obama jobs plan includes a tax cut that would help working Americans.
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President Obama's new employment plan is partly a jobs program and partly a tax cut.

Thus, if it gets passed by Congress and if it works, employed and unemployed Americans should see some help.

Those are two very big ifs, of course. Getting anything through Congress these days is tough for the administration. Even if the Obama jobs plan does pass, government programs don't always create the number of jobs that politicians claim they will. And they don't do it very cost effectively.

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Still, at a time when the recovery has stalled, doing something, anything, to address the issue is not only good politics, it could also help buoy confidence at a time when it is sinking.

So which pieces of the Obama jobs plan can get through Congress? The biggest and boldest piece is his proposal to expand and deepen the cut in payroll taxes. The idea has some advantages that could give it some political momentum:

  1. It's already in place in a more limited form.
  2. It's a tax cut, which should appeal to Republicans.
  3. It includes a tax break for businesses as well as workers, which House majority leader Eric Cantor has suggested could win GOP support.

If the payroll tax cut should pass, here's what it would mean for you.

Typically, workers pay 6.2 percent of their earnings to fund Social Security (and employers pay a matching 6.2 percent). But for 2011, the federal government agreed to cut the payroll tax rate temporarily to 4.2 percent (employers are still putting in 6.2 percent). For 2012, Obama proposes to cut the rate temporarily to 3.1 percent (employers would also see a reduction to 3.1 percent).

So, if you expect to earn the median income of $26,500 in 2012, you would pay $822 in payroll taxes. That's a $291 savings over what you're paying in 2011 – and an $822 savings over what you'd pay in a normal year. If you will earn $50,000 a year in 2012, you would pay $550 less than what you're paying this year and $1,550 less than what you would be paying ordinarily.

In either case, that's the equivalent of getting a 1.1 percent raise next year (or a 3.1 raise over what you'd make in an ordinary year). That's not bad for a tax break.

For high-income Americans, the tax break turns out to be higher in absolute terms, but lower in percentage terms. That's because Social Security only taxes the first $106,800 of annual income. So, if you will make $150,000 a year (and the earnings limit isn't changed for next year), the Obama plan would save you $1,175 in taxes in 2012 compared with this year and $3,311 compared with a normal year.

That amounts to a 0.8 percent raise over 2011 or a 2.2 percent raise over a normal year.

If you're unemployed, the payroll tax doesn't apply, so you wouldn't get any tax break (and other federal taxes would still apply). That's why you'll have to hope that the tax breaks help the economy recover more quickly and, thus, create more jobs – or that Congress will pass other parts of the Obama jobs plan, which are more directly aimed at increasing employment.

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