Extending the “Payroll” Tax Cut

While the Democrats and Republicans in Congress posture over extending the so-called payroll tax cut, the facts about the impact of this policy are lost in all the bombast. In reality, taxes cut are not nor have they ever proven to be effective stimuli to a sagging economy. If the two parties can make headlines with their fight over these tax cuts, it gives the appearance that they are trying to actually do something, and hide the fact that this may well be the most ineffective and unproductive Congress in generations.

Let’s start with some facts that seem to have gotten lost in the shuffle. First, by calling this a “payroll” tax cut, the administration is camouflaging the fact that it is a Social Security tax cut. While one side of the aisle tries to deal its deathblow to Social Security by claiming that it is on a collision course with insolvency, the other side of the aisle is hastening that insolvency by reducing its only source of income – the Social Security tax. The two percent reduction in the Social Security tax essentially robs $265 billion from the Social Security trust fund. This “incidental” fact has never entered into the arguments on Capitol Hill.

If it is true that the Social security trust fund is heading toward insolvency, then why deny it more funds? As usual, the answer is a shortsighted fiscal policy and politicians who cannot see beyond their next election.

Cutting taxes as a stimulus to the economy is a straw dog. Politicians settle on this because it seems as though they are doing something and voters like to have more money in their pockets. According to the Congressional Budget Office each $1 million in tax cuts creates thirteen new jobs. That translates to a cost to the government of $77,000 per job created. On the other hand $1 million in unemployment benefit creates 19 new jobs for a cost of $52,000 per job. The reason that unemployment benefits creates more jobs is that people collecting benefits need that money to meet daily expenses and will spend it immediately while a social security tax cut goes to people who are employed and many of them will not spend their tax break but will save it instead.

The GOP members of congress are insisting that spending cuts offset any tax cut. However when they championed the extension of the Bush era tax cuts, there was no such demand. So the GOP platform seems to be that tax cuts for the wealthiest Americans are solid fiscal policy while tax cuts for working families are dangerous fiscal policy that must be offset. This position becomes clearer when one looks at the offsets being suggested by the Republicans.

One idea being floated by the GOP is a pay freeze for federal workers and a reduction in the federal workforce by 10%. Both would further harm the economy, and both place an inordinate burden of reducing the deficit on working families. A ten percent reduction in the civilian workforce of 2.15 million would result in 215,000 jobs lost, offsetting the 265,000 jobs that would be created by the payroll tax cut. The dollar savings would be approximately $1.6 billion to offset a tax cut of $265 billion. Either the GOP leadership cannot do simple math or the real reason behind their plan is to gut Social Security and the work of the federal government.

However there are ways that can bring more funds into the federal government and maintain the solvency of the Social Security system well into the future. The first step would be to eliminate the Social Security tax cap. Currently all employees pay Social security tax on the first $106,800 of salaried income. Other income such as investment income, business income, etc are not subject to this tax. As a result of this wage cap, higher income workers pay a substantially reduced Social security tax rate. For example, at the current rate of 4.2%, all workers earning less that $106,800 pays the full tax rate on all of their salaried earnings. However, a hypothetical salaried employee earning $213,600 is only paying a rate of 2.1% of salary. Eliminating the cap would not only make Social security a more progressive and fairer tax but it would guarantee solvency well beyond 2075.

Another plan by the GOP, again focuses on some of the most vulnerable people in society - reducing Medicare reimbursements to senior citizens. This plan is in response to the astronomical growth of Medicare costs. However, what is being ignored here, is that under the previous administration, the Medicare was prohibited from negotiating drug prices with the pharmaceutical industry. In essence this translates into a $29 billion dollar annual subsidy to big pharma. Unlike other prescription drug suppliers Medicare is the only major insurance company that is barred from negotiating prices. As an example, Medicare currently pays 58% more for prescription drugs than the Veterans Administration that is permitted to negotiate.

Another step would be to eliminate the Bush era tax cuts, which went overwhelmingly to the wealthiest Americans. The extension of these cuts were justified as a fiscal necessity in this economic downturn. But if they indeed were needed as a stimulus, they should have softened the economic downturn that began during the prior administration. Another example of how tax cuts, do not stimulate the economy and that the cost of extending these cuts - $220-300 billion – is poor fiscal policy.

One more quick fix that would not only help reduce the deficit and also bring an increased level of fairness and rationality to US tax and fiscal policy are the subsidies aid to the oil companies. While posting record profits and increasing her costs to consumers, big oil enjoys $4 billion a year in tax subsidies. However, in this new world of Repubospeak, any attempt to bring an increased level of fairness and equity to tax policy is defined as a tax increase.

If we were to implement these simple fixes the total saved would be between $234 and $334 billion. That total is achieved through saving $29 billion in Medicare art D, $200-300 billion in Bush tax cuts and $4 billion in oil subsidies. These are just three quick fixes that bring fairness and restore some level of responsibility and fairness to federal tax and fiscal policy. I am confident that here are dozens more such items in the federal budget that can result in billions more in savings. But these will never be implemented because it is not about reducing the deficit, it is about starving government and creating a crisis in Social Security to justify gutting this country’s most successful social program.