Within the payroll tax holiday and just how to experience a content one

The Bush tax cut offer includes a payroll tax holiday that gives most employed Americans a two percent increase. Legislators regard a payroll tax holiday as a way to stimulate the economic climate. The theory is that consumers will spend the extra earnings. Financial theory, however, might suggest that that money can be saved or invested instead. If all goes as prepared, people should have less of a have to get a paydayloans.

Payroll tax holiday: economic stimulus?

The payroll tax holiday proposal rolls back the employees’ share of the payroll tax from 6.2 % to 4.2 % on income up to $106,000. When the tax deal was announced, firms like Deutche Bank revised their economic growth predictions for 2011 from 3.3 percent to 4.1 percent. Want to know the math behind that? Here it is:

Wages and salaries in the U.S. in 2010 total $6.44 trillion. That figure grew nearly 5 % 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 percent of estimated 2011 GDP — would be spent. Therefore, 3.3 + 0.7 = 4.1 %.

The reality of the Permanent Income Hypothesis

The majority are saying that there is too much optimism. This would be from Deutche Bank. Spending won't increase that much though. John Carney at CNBC suggests that knowing the 2 percent raise is only temporary could be why informed consumers don't spend more. There is a name for this made up by economists. Permanent Income Hypothesis is that name. Future earnings are what people spend based upon off of. Current take-home pay doesn't do that. Many people didn't save anything and would always spend more than earned before the financial crisis. Then the bottom fell out. 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 is a good plan for the payroll tax holiday? Spending it isn't the suggestion SmartMoney gives. Putting it in a Roth IRA, a traditional IRA or a 401(k) is the suggestion. The money will then be worth something. It will still be worth something after 2012 when the payroll tax holiday ends. You might end up just paying for the health care costs that are expected to rise next year. Buying new appliances is a new option. You could conserve hundreds of dollars in a few years with more energy efficient home appliances.

Articles cited

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