Friday, December 2, 2011

Payroll tax holidays: how to grow the debt

Article  first published as Disguising the Cost of Payroll Taxes on Technorati.

The rhetoric over the expiring payroll tax holiday is fiery and partisan, like most everything else in Washington these days. The President very badly wants the holiday extended and even expanded. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 established a 2% employee side payroll tax cut--which the White House said would provide working families with an additional $1000--that was specifically a temporary measure, due to expire at the end of the year. The new proposal calls for extending the tax holiday and lowering the rate another 1.1%.

Prior to the 2010 Act, payroll taxes were 6.2% of income (up to the $106,000 threshold). The Act lowered the rate to 4.2%. The new plan would have the rate lowered again to 3.1%. Follow that? Payroll taxes will be essentially cut in half.

The President points out that Republicans are generally in favor of tax cuts, so there's no reason for them to balk at this one. And given the play such talk is getting, Republicans seem to have come around, now indicating they will go along with the idea, though they are still unwilling to accept the President's proposal on how to "pay" for the tax cut. The President wants a new tax: the millionaire surcharge he's been pushing for quite some time now. The Republicans are still against it, of course, but really aren't offering much of anything as a counter-proposal.

So it looks like the President has the upper hand, though this doesn't mean the Republicans will cave in to the millionaire surcharge, only that they will put themselves in a position where it is easier to portray them as uncaring bastards in the pockets of the rich. Which demonstrates that this entire spiel is more about the 2012 elections than it is anything else.

But be that as it may, some sort of payroll tax cut is still likely to occur, and it's important to understand what that really means, what the last one--now expiring--really meant. Simply put, payroll taxes fund Social Security. They don't do it directly, but they are used to establish how much money is supposed to be in the Social Security Trust Fund. So over the past year, the monies going into Social Security would have to be decreased because of the cut in payroll taxes. To prevent that from happening--because Social Security is already running at a deficit--the Federal Government had to borrow money to make up the difference, which went directly to the National Debt.

Extending and increasing the payroll tax cut would require similar actions in 2012. We often hear how lowering taxes is essential spending, since it costs the government revenue, but this is an untruth. The government need not spend money it doesn't have. Payroll taxes are different, however. Social Security is something everyone pays into with the understanding that they will receive their future benefits. Payroll taxes are thus not the same thing as income taxes, since the latter are monies the government can spend however it sees fit.

If the goal here is increase the take home pay of average Americans, why not simply cut income taxes? Why the game with payroll taxes? The answer is because the government can disguise the real cost of these cuts, as it has already done.

Cheers, all.

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