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How Obama is Going to Pay for a $245 Billion Cut to Social Security Contributions

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out of work free cardWe all know the United States needs jobs. We need jobs right now! Last week Obama proposed a new Stimulus plan, which we did a first pass on. Unfortunately most press is busy covering superficial politics instead of what is in the bill, how it would be paid for and most importantly, the effectiveness, or lack thereof.

USA today claims the plan is to tax the rich as they put it, or as we put it, close loopholes and tax hedge fund managers, currently living living high off the hog at a 15% tax rate.

Here's the gist of how Obama plans to pay the $447 billion his plan costs.

  • Limit on itemized deductions ($200,000 individuals, $250,000 families) - $400 billion
  • Carried interest would be treated as "ordinary income" rather than at capital-gains rate - $18 billion
  • Oil- and gas-company tax breaks - $40 billion
  • Corporate-jet depreciation would change - $3 billion

Payroll Tax Cut As Stimulus

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One cornerstone of Obama's jobs plan is a $120 billion payroll tax cut. This tax cut has been enacted already for 2011 and according to Obama, the claim is this tax cut put an average $1000 into worker's pockets.

This is a tax cut that reduced those Social Security contributions, what you see as FICA, the social security component, on your W-2, by 2% for 2011. That's right, they defunded social security by 2% for 2011.

Social security is calculated on gross income, normally 6.2%. This is why attacking social security is almost a crime. You've actually been putting money into your benefit your entire working life. It's capped to a wage base and for 2011 it's $106,800.

Additionally, median income is a tad misleading, for it's household income, on aggregate, instead of individual income. Additionally, it's not median wages, which since social security is a regressive tax, affecting wage earners disporportionately, using median income to estimate the tax benefit isn't quite right. After all, most of us are have nots, the median wage for 2009 was $26,261, much lower than the household median income of $49,777 for 2009.