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Can’t Cheer at Republican Cave

Regular readers know that I’ve been very unhappy about how Democrats in Congress routinely give into Republican demands on taxes and spending. In the case of the payroll tax holiday, we appear to have one of the few examples where Democrats made the Republicans cave, at least for the moment. The lower payroll taxes are safe through February.

I can’t cheer this for two reasons. First, the Democrats “won” by using a Republican talking point – “It’s not fair to raise taxes on _____. What kind of tax hiking bureaucrats are you?” in response to an expiring tax provision. This is how the Republicans in Congress won an extension of the Bush tax cuts even though they are one of the larger drivers of the deficit. This “victory” reinforces one of our current central dysfunctions in the United States today – It is not only impossible to raise taxes, but it is also impossible to pass actual “tax holidays” where taxes are cut temporalily. All tax cuts become permanent regards of any other fiscal condition. I just can’t cheer for that sort of rigid inflexibility. I voted for Democrats at the federal level in 2006, 2008 and 2010 in part so they could break that up-till-now Republican doctrine. It’s just one more disappointment that they are reinforcing it instead, led by the President and his countdown clock.

The other reason that I can’t cheer the Republicans agreement to continue the payroll tax holiday is related to the purpose of the payroll tax itself. The term “payroll tax” encompases two taxes – Social Security and Medicare. Social Security taxes are only levied on the first $106,800 of income. Medicare tax is collected on one’s entire income.

Social Security and Medicare are not funded out of the regular federal budget but out of a combination of payroll taxes and surpluses that have built up over the years. These surpluses are kept in US Treasury notes.

According to the Board of Trustees for Medicare and Sociality Security, both funds are relatively ok for a few more decades, at which time existing payroll taxes will only be able to pay 75% of current Social Security benefits (2036) and 90% of current Medicare benefits (2024).

Buried towards the bottom of the 2011 report summary is this paragraph (Emphasis Mine):

Note two caveats concerning these rates. Public Law 111-312 reduces the OASDI tax rate for 2011 by 2 percentage points for employees and for self-employed workers. The loss of payroll tax revenue due to this one-year reduction will be made up by transfers from the General Fund of the Treasury to the OASI and DI Trust Funds and will thus have no financial impact on either program. Furthermore, starting in 2013, the Affordable Care Act imposes an additional HI tax equal to 0.9 percent of earnings over $200,000 for individual tax return filers, and on earnings over $250,000 for joint return filers.

 Keeping the Social Security and Medicare Trust funds solvent till the 2030 timeframe assumes either the payroll tax holiday will expire OR that we will continue to fund the “holiday” with general funds (income taxes and borrowing). If the tax “holiday” become permanent and Congress loses its will to make up the difference with general funds, then the date when the trust funds get exhausted will be sooner than currently predicted. This won’t help anybody.

Middle and lower income people are struggling. I just don’t think that mortgaging their future to help them pay for the present will help. If payroll taxes should be lower, then look at either removing the income limits or in the case of Medicare, be willing to accept evidence based outcomes and other health cost control measures.

Finally, the President and Congressmembers in both parties ought to start really evaluating what works and what doesn’t in creating jobs, not making political points with a dogma of “no tax increases ever” that will bankrupt this country.

References:

60 More Days of the Same, OpenCongress Blog, December 23, 2011, Accessed December 24, 2011.

The Chart That Should Accompany All Discussions of the Debt Ceiling. Fallows, James. The Atlantic. July 25, 2011, Accessed on December 24, 2011.

IRS Education Module. Payroll Taxes and Federal Income Tax Withholding. Accessed on December 24, 2011.

Summary of the 2011 Annual Reports: Social Security and Medicare Boards of Trustees. Accessed on December 24, 2011.

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