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Tax Bill: ‘Holiday’ on Payroll Taxes, Business Investment

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The bipartisan tax deal that passed the House late Thursday night was signed by President Barack Obama Friday afternoon.

Democrats opposed the bill primarily because of the extension of the Bush tax cuts for income over $250,000, as well as an exemption in the estate tax provision. Republicans opposed it because of the amount other provisions will add to the deficit; the total cost is projected by government analysts at $857 billion over 10 years. The tax cut extension alone, for all brackets, will add $407.6 billion to the deficit.

While the main focus of the bill is on extending the cuts for another two years and unemployment benefits for 13 months, it also includes several other provisions, including two that are not extensions of previous policies. Those are a Social Security tax holiday for workers, and an immediate full write-off for businesses of investments in software, equipment, and even whole plants. Normally those capital expenditures must be depreciated over time. According to a Bloomberg report, the capital expenditures measure will be effective for purchases after Sept. 8, which is the day Obama first suggested the idea.

The Social Security tax holiday, says a CNN Money report, will drop the portion of the payroll tax that workers pay by nearly a third, from 6.2% to 4.2%, on wages up to $106,800. Employers’ contributions to Social Security will remain the same. Many Democrats objected to this provision because they see it as endangering Social Security long term, since the government will need to borrow $112 billion to finance the measure. The tax cuts amount to approximately $1,000 for workers making $50,000, and $2,000 for those making $100,000. This measure replaces the Making Work Pay credit that expires at the end of 2010.