Payroll tax 'compromise' builds uncertainty.

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Scanning news headlines this morning, one might get the impression that Congress has achieved a great political breakthrough, salvaging a piece of relief for taxpayers around the country and resolving a difficult dilemma.

In truth, the legislative branch simply kicked the can down the road.

Trapped between the conservative wing of his own party and the Democrats, who held the political high ground in this particular fight, House Speaker John Boehner (R- Ohio ) agreed to extend the payroll tax cut instituted last year. That particular cut reduced individual contributions to Social Security from 6.2 to 4.2 percent, though many laborers failed to notice it .

The major problem is this: Rather than resolving to remove or sustain the cut, the bill, dubbed HR 3765, just extends it two months into 2012. That uncertainty causes a headache for payroll processing companies and generally complicates the process of filing income taxes - as if that wasn't already complex enough.

Via a process called 'unanimous consent," the bill passed both houses of Congress without debate and will now go to President Obama's desk for his signature.

Even the success of the bill will be problematic. In two months, this debate will re-ignite, and with elections looming the stakes will rise. Uncertainty often damages business confidence more than bad policy, and small businesses where payroll is already complicated will be further unsettled. Equally problematic are the bargaining chips being traded, including cuts to unemployment benefits, tax increases on highest-paid Americans and possible federal employee layoffs.

A new wave of austerity might hurt businesses, since laid-off bureaucrats and those no longer receiving unemployment buy fewer goods and services. There's also a strange effect generated by one of the bill's compromises.

Democrats initially laid the bill out so that the 2 percent cut applied only to the first $18,350 of pay, or one-sixth of the $110,100 to which the original tax cut applied. Republicans reworked that bit of the bill, allowing all of the $110,100 to get the 2 percent cut, Bloomberg reports. A company could theoretically front-load someone's salary into the first two months of the year to take advantage of it - but then an extra tax will kick in for returns filed in 2013.

Estimates of the costs of tax compliance in the U.S. vary, and are often issued by organizations with a vested interest in the matter. However, it's generally agreed that it reaches into the hundreds of billions.

In the meantime, consumers can enjoy a generous 2 percent boost to their take-home - for two months, anyhow.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: News Headlines , Taxes , US Markets

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