Tuesday, December 20, 2011

The real problem with the payroll tax holiday

Charlie Pierce spells out clearly the political problem with President Obama's "temporary" payroll tax cut: it allows the opponents of Social Security to portray it as a welfare program that is draining tax revenues from hard-working families to give to unworthy types. Here's his version from The Truth About Our Payroll Tax Cut Esquire Politics Blog 12/19/2011

In our current political climate, and in the political climate that is likely to prevail for the balance of my lifetime, it's almost impossible to reverse a tax cut already in place because of the same dynamics that make it almost impossible to levy a tax increase on any group of people with sufficient clout to resist it. One of the reasons we're in the mess we're in today is that George W. Bush rammed through tax cuts the benefits of which accrued for the most part to the richest people in the country. He then launched two off-the-books wars and passed a new Medicare entitlement that was paid for largely through the sale of magic beans. And even with all of that, and even with all of official Washington having conniption fits over The Deficit, the government is ripping itself apart trying to rescind only those parts of the Bush tax-cuts that benefited the richest members of society. Nobody who can fight it ever gives back a tax cut. Ever.

Given that, there is no reason to believe that the payroll tax-cut will be any different. Restoring the payroll tax to the level where it was before the payroll tax-cut was passed — 6.2 percent from the current 4.2 percent — means that an average taxpayer will get socked with a 48 percent real tax increase one day that he didn't have the day before. (In fact, this is precisely what the White House is arguing at the moment in connection with the Republican shenanigans in the House.) It's going to take some powerful convincing to make me believe that this tax cut is ever going to go away because I don't think there ever again will be enough politicians with the gumption to tell their constituents that their taxes need to be raised. Better to con them with austerity plans that will convince them that it is their patriotic duty to make their own lives worse. At least, with those, that sweet, sweet corporate money keeps rolling in for the next campaign.

That being the case, it's hard to see how this is good for the long-term stability of Social Security. The bite that the payroll tax-cut is taking out of the system's dedicated revenue stream is supposed to be made up out of general revenues. But that hardly seems politically tenable, either. It seems to throw Social Security firmly into the roiling abyss that is our current argument over federal spending, which can't be good. If you can cut the EPA's funding, and if you can slash asthma relief for urban children, it seems to me that, sooner or later, you can take a whack at the $120 billion or so that are supposed to be transferred to the Social Security trust fund from general revenues. You then present the country with a Social Security "shortfall" and, suddenly, privatization is back on the table again.
Franklin Roosevelt insisted on having a dedicated funding stream for the Social Security social insurance fund, to emphasize that it is social insurance and to give people a clear sense that they were contributing to their own retirement security through the tax. That arrangement has been an important part of the program's secure political support.

Since the Obama Administration has periodically pushed for a Grand Bargain involving the phaseout of Social Security and Medicare, they have removed the partisan firewall that the Democratic Party has long maintained around both Social Security and Medicare. It's hard to imagine the Administration didn't also have in mind how the payroll tax "holiday" - which as Pierce says, could easily become permanent - could open a new line of attack against Social Security.

There are other options such as a tax rebate of a similar amount that could be structured to go to everyone who pays payroll taxes.

An adherent of Keynesian economics like Robert Reich finds the payroll tax idea attractive because it's easy to implement and provides additional funds to people who are most likely to spend it immediately and therefore provide a stimulative effect to the economy. But the political problem it presents for Social Security that Pierce explains so well is real.

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