Pressure is building on President Barack Obama to call for an extension of the so-called payroll tax holiday. Keeping it in place, say the people who favor the idea, brings some kind of needed economic stimulus.
It’s something the president apparently wants to do. He, and others who support it, portray it as a way to provide tax relief to income lower- and middle-class income earners that somehow “offsets” what many liberals regard as the “unfairness” of continuing the temporary lower income tax rates on high-earners.
In reality it’s a dangerous idea, almost certainly doing more harm than good.
As an economic argument, it’s nonsensical. By reducing taxes on the upper end of the income stream, as was demonstrated clearly during both the Kennedy and Reagan administrations, money that would otherwise go to the government is freed up for savings and investment in the private marketplace, leading to expansion and job creation.
The Obama payroll tax holiday has no such effect because it applies only to the Social Security taxes paid by on incomes less than $106,800, not the portion paid by employers – which remains at 6.2 percent. As structured, there is no incentive for employers to hire more workers, reinvest in a business or expand it. Workers end up with a little more in their take home pay each week but that’s about all.
That’s the good news. The bad news is that the proposal threatens the solvency of Social Security – not in an immediate way – but by reducing the amount of money going into the trust fund, it puts it on an even faster track toward insolvency.
Here are the facts. According to the 2009 Annual Report of the Social Security and Medicare Board of Trustees, by 2017 Social Security is expected to start paying out more than it collects in payroll taxes. The surplus, which is currently quite large, will be exhausted by 2037 – at which point benefits may be cut by 25 percent, CNBC said last year.
The nonpartisan Congressional Budget Office, which has also looked at the situation, reached the same conclusions but suggested that it will take longer to occur than what the trustees forecast, said the same report.
Either way, cutting contributions to the trust fund in a way that does nothing to generate more jobs – which is what Obama’s payroll tax holiday does – brings the collapse of Social Security that much closer. It also increases indebtedness, which seems to be something of an official administration policy these days.
The idea behind the push to continue the holiday is about raising Social Security taxes – most likely by broadening the base by raising the threshold at which income is no longer taxed. Vermont’s Bernie Saunders, the Socialist who caucuses with the Democrats in the U.S. Senate, has made that much clear by announcing he intends to introduce legislation that would, as The Hill put it, “expand the reach of the payroll tax.”
The Saunders bill would make individual incomes in excess of $250,000 per year subject to payroll taxes, eliminating the current cutoff of $106,800, with the odd wrinkle that incomes between those two figures would not be subjected to additional taxes. The plan would, nonetheless, virtually complete the transformation of Social Security from some kind of quasi-insurance program, as it was originally intended to be, into a transfer payment welfare program – something that is sure to be politically popular with the president’s base and with the nearly 50 percent of Americans who pay no income taxes at all. But it’s bad economics.
The people who oppose the extension of the payroll tax holiday are right to do so. It’s demand-side vote buying that really does nothing to stimulate the U.S. economy. Moreover, it makes Social Security’s books just that much more out of alignment – which is not the way we as a nation should be heading. The approach we should take, the one that would do the most good for the greatest number of people, would be to find ways to stimulate savings, reinvestment, economic expansion and job creation.
There are plenty of ways to do that – including the creation of a fairer, flatter, simpler tax code, a reduction in U.S. corporate tax rates (currently the world’s highest), a move to a territorial tax system so that corporate profits from overseas that have already been taxed in the country where they were earned can be brought back into the United States without being taxed again and a real revolution in regulatory policy, one that ends the federal government’s practice of chasing jobs out of the U.S. based on junk science and political concerns.
The right answers are right in front of us. Accelerating the trend toward Social Security’s insolvency, as the extension of the payroll tax holiday would do, just isn’t one of them.