payroll tax cut

One Simple Measure That Would Save Social Security and More

Joseph M. Firestone — Tue, 21 Aug 2012 14:38:11 -0400

The Fiscal Times is a digital rag funded by Peter G. Peterson to propagandize the ideology of neoliberal austerity. Yesterday, a post by Josh Boak highlighted the proposal of “fixing” Social Security by lifting the cap on payroll taxes.

”Social Security already appears to be running aground, just two decades before the program — which accounts for about 20 percent of federal spending — is projected to crash into insolvency.

“The program launched during the Great Depression — keeping millions of senior citizens from sliding into poverty — has steadily been paying out more in benefits than it collects in taxes, relying on the interest earned on federal bond holdings to help bridge the difference. Social Security costs are estimated to total $789 billion this year, paid for by $623 billion in payroll taxes.

“There’s an easy repair, but it involves drastically hiking taxes, so voters aren’t hearing about it on the campaign trail. Under federal law, millionaires and billionaires get to dodge payroll taxes on a substantial percentage of their salaries. Employers and workers are charged payroll taxes on salaries up to $110,100 a year, meaning anything above that — a category that includes some of the middle class — is payroll-tax free. Simply lifting that cap would cover about 90 percent of the projected shortfall over 75 years, according to forecasts by the Social Security Administration.”

Boak then goes on to point out other difficulties with, as well as benefits of, the proposal.

Even though this proposal is very simple; there is an even simpler solution the problem, without the drawbacks. Stephanie Kelton outlines it this way:

“Every year, the Trustees of Social Security and Medicare issue an annual report that examines the financial status of the various “trust funds” that purportedly sustain these vital programs. Social Security’s (OASI) and (DI) Trust Funds, as well as Medicare’s (HI) Trust Fund all face chronic problems, some in the not-too-distant future. In contrast, Medicare’s (SMI) Trust Fund always receives a clean bill of health. Why is that?

“The answer is so simple it apparently escapes notice, but here it is, straight from the annual report:

“The Hospital Insurance (HI) Trust Fund is expected to remain solvent until 2029. The Disability Insurance (DI) fund is projected to become exhausted in 2018. And the Old-Age and Survivors Insurance (OASI) Trust Fund is considered adequately financed until 2040. In contrast:

“Part B of Supplemental Medical Insurance (SMI), which pays for doctors’ bills and other outpatient expenses, and Part D, which pays for access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs.”

“In other words, it is sustainable — INDEFINITELY — because the government is committed to making the payments. Indefinitely.

“And, as we have argued many times on this site (and elsewhere), the same commitment can easily be made to sustain Social Security (OASI and DI) and Medicare (HI) in their current form. There is no economic justification for cuts to either program. The decision is entirely political.”

So, the simple solution to the Social Security solvency “problem” (if something with such a simple solution can be called a “problem”) is for Congress to make the financing for Social Security (OASI and DI) automatic.

Of course, the first thing anyone will say about this simple solution for Social Security is that it's not really a solution to the SS solvency problem because it just transfers the financing problem from payroll taxes to general tax revenues, and the solvency problem from SS alone to the whole Federal Government. However, as I've been at pains to point out in many, many posts in the past, for example, here, here, and here, there is no solvency problem for a Government like the US with a non-convertible fiat currency, a floating exchange rate, and no debts payable in currencies it doesn't issue. For example, here's how automatic financing of SS by Congress could easily be managed.

First, the President should use the authority provided by a 1996 law to mint a $60 Trillion coin and deposit it at the Federal Reserve.

Second, Congress should make SS funding automatic.

Third, Congress should also provide for imposition of the payroll tax at the discretion of the President, with the maximum payroll tax set at what it is today, but with the payroll tax salary cap removed to at least reduce the regressive character of the payroll tax.

Fourth, the President should reduce the payroll tax to zero for both employers and employees, until full full-time employment is reached. At that point he or she can use the authority provided by the Congress to gradually re-impose the tax, if and when inflation reaches 3%.

The effect of these changes would be to immediately add $625 Billion plus to the Federal deficit, but not to the Federal debt because the increased deficit spending would be covered by credits issued by the Federal Reserve to the Treasury upon depositing the $60 T coin. This increase in the Federal deficit will move the economy forward, since we know that most SS recipients would just spend the additional money, and since the Federal deficit is projected at about $1.2 - $1.3 Trillion right now, which is at least 3% of GDP UNDER where the macroeconomic sectoral financial balances model says it should be for full employment, assuming that the trade deficit will be about 4% of GDP and savings will be at 6% of GDP. I say, at least, because so much of deficit spending is tied to subsidies for well-off corporations and individuals and so has low fiscal multipliers, providing more space than otherwise for even higher deficits before demand-pull inflation becomes a problem.

Apart from the extra stimulus provided by using deficit sending to finance SS, the changes I've proposed would provide an additional automatic stabilizer to the economy. SS would contribute much more stimulus to the economy on a continuing basis to the economy than it does now. But in addition, and unlike the situation from the 1980s until very recently, SS would provide a fiscal drag on the economy, only when a fiscal drag was needed to fight inflation. Otherwise it would provide only continuing stimulus.

So, there we are, a simple solution for SS solvency, and an accompanying answer for those who are worried about “how we gonna pay for that?” In both cases, there really is no “problem.” Just a few simple things to do to change a “problem” into an “opportunity!”

(Cross-posted from Correntewire.com.)

Republicans: Against It Before They Were For It

Leo Gerard — Tue, 21 Feb 2012 09:44:17 -0500

First, Republicans opposed extending the payroll tax cut that put an extra $20 a week in the pockets of 160 million working Americans.

Next, they supported it. If the cost were offset the way they wanted. Even though Republicans previously had said that tax cuts never need be offset.

After that, they opposed a stopgap measure extending the break by two months. Even though the cost was offset.

Ultimately, they approved the 60-day extension.

Then, they opposed extending the tax cut another 10 months. Unless the cost were offset.

Finally, however, they supported that. Even though the cost was not, in fact, offset.

What’s that sound? It’s the frantic flailing of a grounded GOP fish: flip flop, flip flop, flip flop.

Republicans revel in casting themselves as the principled party. They claim they’re the moral majority. Their values, they contend, are unshakable. So their serial waffling on this issue is confusing. Against it; for it; against it; for it. Isn’t that what they ridiculed a Democratic Presidential candidate for?

There’s a simple explanation, however. Throughout this entire episode, Republicans never wavered or vacillated or faltered in any way in performing their most vital, their most basic function as a political party: pandering to the rich.

The thread running through this drama, from beginning to end, is Republican opposition to equitably taxing the rich. The GOP did whatever it took to prevent the nation’s millionaires and billionaires from parting with another cent. In the end, the party’s public image took a beating. But Congressional Republicans triumphed in shielding the nation’s richest from paying their fair share.

So focused are Republicans on providing welfare for the rich in the form of special tax breaks and perks that initially the party didn’t support extending the payroll tax cut for the middle class at all. Late last November, party leaders, including U.S. Sen. Jon Kyl of Arizona, announced they opposed a one-year expansion. Republicans said they’d allow a temporary tax cut for the middle class to expire, no problem, even though they’d previously contended they couldn’t end the supposedly temporary income tax cut Bush gave the rich because that would be a “tax increase,” and they could never support a tax increase. Not ever.

For Republicans, who are so true-blue to blue bloods, the real problem with extending the payroll tax cut for the middle class was that Democrats proposed paying for it with a small surtax on the nation’s wealthiest.

That confronted the GOP with a choice: side with the rich or go with the middle class. This was hardly a Sophie’s Choice, however. It was no difficult decision for the average American, say one of the 160 million for whom the extra $1,000 a year from the payroll tax break is meaningful.

Despite that, the GOP sided with 350,000 millionaires and billionaires. Republicans worked to ensure those millionaires and billionaires would not have to pay an additional amount insignificant to the 1 percent individually, but collectively substantial to the federal budget.

Within days of Kyl’s assertion that the GOP opposed adding a year to the payroll tax cut, Republicans changed their minds. They would go for the extension, they said, if the cost were offset not by taxing the rich but instead by freezing the wages of federal workers for a third year in a row and eliminating the jobs of 210,000 of them.

Their logic was straightforward – if the middle class were to get a break, then the middle class would pay for it.

Democrats, and the vast majority of Americans, disagreed.

Stymied on a year-long deal, the two parties arranged a two-month reduction, the cost of which was offset. Even so, House Republicans rejected it. Before they accepted it.

At the time, Republican U.S. House Speaker John Boehner said Americans could “take to the bank the fact that” a payroll tax cut extension for 10 additional months “will be paid for.”

Seventy-eight days later, Boehner and his Republican crew agreed to extend the tax break without an offset.

Never mind, then.

In a presidential election year, Boehner & Co. surrendered to a simple calculus: the 99 percent has something that the 1 percent doesn’t – more votes. Way more. And polls show American opinion is just the opposite of Republican position on these issues. Americans strongly support raising taxes on the rich, while they strongly oppose ending the payroll tax cut for the 99 percent.

The GOP was cornered. If it wanted to win elections, it must appease the 99 percent. If it wanted to remain true to its core values – pandering to the rich – it must refuse a surtax on the 1 percent.

So Republicans flip flopped on the easier issue – appeasing the unwashed masses. Have your payroll tax break extension, damn it.

Unfortunately for the GOP, the masses may be unwashed, but they’re not unwise. This time last year, 63 percent disapproved of Congressional Republicans; by January, 75 percent disapproved of the GOP.

There’s just something so unappealing about a flip flopper. But as U.S. Sen. John Kerry can tell you, Republicans know that.

Why the Payroll Tax Cut's Liberal Apologists Are Wrong--and FDR is Right

Daniel Marans — Mon, 13 Dec 2010 12:53:54 -0500

The one-year payroll tax cut proposal in President Obama’s tax deal with Republicans has Social Security advocates worried that the reduced tax rate will become permanent, doubling Social Security’s financial deficit and jeopardizing the economic protections it provides to American workers and their families.

Some on the left agree that the payroll tax cut is likely to be extended, but see nothing wrong with decoupling Social Security from payroll taxes, and making it at least partly dependent on revenue from the general fund. They argue that paying Social Security benefits out of the general fund would replace the payroll tax with a far more progressive source of revenue. By allowing Social Security to be funded out of the income tax, the argument goes, it reduces the overall burden on the middle class. In addition, they contend, Social Security would never again face a financial shortfall like the current one, because it would be free to borrow as needed.

This argument has merit, but are the potential benefits of making Social Security a standard budget item worth risking the whole program? Social Security is an independent program that has survived largely unchanged for 75 years, but making it depend on general fund revenue puts it at the whims of Washington politicians.

Social Security’s independence from the general fund has been a fundamental feature of the program since its inception. Franklin Delano Roosevelt famously said that payroll taxes “give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.” It is a statement that has rung surprisingly true. Social Security’s sense of ownership grants the program universal approval across the political spectrum; even Tea Party Activists wave signs stating, “Keep your government hands off my Social Security.” The political winds have changed time and again, but Social Security has never wavered in popularity. There is perhaps no other government program of which that can be said.

More importantly, Social Security’s independent, dedicated revenue stream in payroll taxes protects it from the cuts that perennially threaten other government programs. But co-mingling Social Security with other government programs would subject it to the yearly spending decisions of Washington insiders, placing it squarely in the cross-hairs of partisan maneuvers and ideological attacks. If Social Security were to depend on funds from the general budget, it would have to compete with other programs for increasingly scarce federal dollars. Under yearly pressure for funding, Social Security would quickly become a shadow of its former self.

Even given its current structure, the ballooning budget deficit has made massive cuts to the program viable once again. The Deficit Commission’s recommendations would cut benefits deeply. But under pressure from advocacy groups to admit that Social Security is separate from the general budget, the Commission justified its proposal on the basis that it would shore up Social Security’s finances, not reduce the deficit. One can only imagine that if Social Security were part of the general budget and actually contributed to the budget deficit, the case for cuts would be that much stronger.

Liberals who think the payroll tax is regressive must ask themselves, Why was Franklin Delano Roosevelt, perhaps the most progressive president in our nation’s history, responsible for its enactment? Roosevelt knew that the universal and flat nature of the payroll tax would be an essential component of Social Security’s popularity. It assures middle class Americans that they are paying into a program for their future benefits. Social Security is not about Washington insiders distributing benefits. In fact, payroll taxes were designed to be more like insurance premiums. Everyone pays the same share of their income into the program, up to $106,800, and everyone is insured when they retire, die, or become disabled. When the flat payroll tax rate is taken together with the progressive benefit formula, however, it becomes clear that Social Security is actually one of our most redistributive government programs. The lower your lifetime wages, the higher the proportion of your earnings will be replaced by Social Security. So while the link between wages and benefits insures the program’s overall fairness, the proportional returns of the program are greatest for those who need them most.

The timing of the payroll tax cut could not have been any worse. Confidence in Social Security’s financial integrity is at a record low. Scores of conservatives were swept into Congress by claiming that President Obama and the Democratic Congress had raided the Social Security Trust Fund. If Congress decides to lower payroll taxes and replace it with funds from the general budget, it will give credence to the myth that Social Security is “broke.” And once given the excuse, Social Security’s opponents will defund the program to prop up their pet projects.

Social Security is a promise. It’s a promise made explicitly on every pay stub. And it is the American public's ownership of the program that has kept the promise alive for 75 years, allowing Social Security to lift 20 million people, including 1 million children, out of poverty this year alone.

But if Social Security's dedicated tax is substituted with revenue from the general fund, it will confirm many Americans' fears that the government has been "raiding" Social Security, severely undermining their ownership of the program. Rather than remain a promise kept, Social Security will be a promise forgotten.

Obama's Payroll Tax Cut: Another Bailout for the Rich

Daniel Marans — Mon, 13 Dec 2010 12:32:10 -0500

We already know the proposed $120 billion payroll tax cut in President Obama's deal with the Republicans poses tremendous risks to Social Security. Now, an analysis done by Nancy Altman, Co-Director of Social Security Works, reveals that it is altogether bad policy. The payroll tax cut would provide far more to Wall Street bankers and members of Congress than poor and middle class workers, who need the help more and are more likely to stimulate the economy with the money they receive.

State and local workers who are not covered by Social Security, including policemen and firefighters, would receive nothing from the plan. Americans seeking employment would also see nothing from the payroll tax cut. By contrast, renewing the "Making Work Pay" tax credit would provide real stimulus to our ailing economy without the handouts for the rich--and all at half the cost of the payroll tax cut.

See below for the Strengthen Social Security Campaign's complete chart comparing the proposed payroll tax cut with the "Making Work Pay" tax credit, or click here: