The Long Game: Payroll Taxes, Hostage-Taking, and Social Security

Yesterday Thom Hartmann and I [1]discussed the proposal to extend and expand what Democrats have called the 'payroll tax holiday.' (Video is below.) There are no heroes in this debate, but there are certainly villains. There are several different ways this could end - and most of them aren't good.

By proposing to expand and extend this 'holiday,' Democrats have bypassed more efficient ways to help the economy, and have once again endangered Social Security. And by demanding tax breaks for millionaires while blocking them for the middle class, Republicans have once again demonstrated their willingness to blow up the economy for self-serving purposes.

The choice is either to back the highly flawed Democratic proposal or let the Republicans block it, which would plunge the economy into an even deeper hole than it's in right now. Imperfect as the proposal is, the alternative is unacceptable. If it failed the already-wounded economy would suffer even more, and millions of jobless Americans would be left without the unemployment insurance they need.

Hostages

This drama's being played out against a backdrop of political terrorism. Republicans have threatened to shut down the Federal government several times if they don't get what they want, and Democrats have violated the 'don't negotiate with terrorists' principle each time. That's encouraged them to keep it up.

That means every Democratic proposal is likely to weakened considerably before passage. And like other Democratic proposals, this one is born weakened. Today the government is operating under a temporary spending measure that expires on December 16. Guess what happens then?

This bill needs to support because there'll be havoc if something like it isn't passed. But we're being given no choice. The Democrats have their hostage scenario - and we have ours.

The Frame-Up

The bill opens up several avenues for ugly compromises. It would extend the current 'payroll tax holiday' for employees, increasing it from 2% of earnings to 3.1%. It would also cut the employers' contribution in half - from 6.2% to 3.1% - for the first $5 million in payroll, and would eliminate it altogether for newly hired employees (for the first $12.5 million in payroll).

What's wrong with that? The first problem is with the framing. The payroll (or FICA) contribution should be seen as a premium, not a tax, especially for employees. Working people are paying into a social insurance program, with the expectation that they'll collect benefits (primarily Social Security, though the tax also helps fund Medicare) from it when they're needed.

By calling their proposal a "tax holiday" and a "middle class tax cut," Democrats are reinforcing the idea that this is just another burden on working people - one that offers nothing in return. That's not true, and it's bad for Social Security.

Holidays in the Sun

Yes, the middle class needs a tax break right now. And we need to put more money into people's pockets to reduce unemployment. But there were and are far more efficient ways to accomplish that, including the Making Work Pay program which the Democrats abandoned last year in favor of the "payroll tax holiday." That program was a better way to stimulate the economy - and it was fairer to the working poor.

Here's why: A payroll tax cut applies to all income up to the tax cap (which is currently about $106,000). So a person making $100,000 will save $3,100, while a person making $20,000 will only save a few hundred dollars. The switch from Making Work Pay to the payroll tax cut actually hurt lower-income working families last year. And those lower-income families are the ones who are most likely to spend that money as soon as they get it, which makes it a more efficient way to help the economy.

Democrats are being a little misleading when they boast that their proposal will save "the average family" $1,500. That's technically true - but it will save higher-earners a lot more and lower-earners a lot less.

The Bottom Line

The tax break for employers makes even less sense. Corporations are already sitting on $2 trillion in cash. The reason they're not hiring people with that money is because there's not enough demand for their goods and services. So what good will a little cash in their hands more do?

Think about it: A 3.1% tax break on people you've already hired isn't going to do much. When I was in the corporate world we typically budgeted 2.5 times a person's salary to determine the total cost of employing someone. That includes salary, benefits, office space, and other expenses. That means this tax break is a savings of 1.24% for companies like mine. That's not going to change very many hearts and minds in the executive suite.

Eliminating the tax altogether for new hires is a better idea - but not much. If a large corporation doesn't think it makes financial sense to hire someone, reducing the cost of that hire by less than 3% isn't likely to change their mind. Overhead costs are much lower for small employers, especially in the age of telecommuting, but even a 5% or 6% reduction in costs isn't going to change too many business owners' minds in this economy.

Want to know a good way to use Federal funds to create jobs? Hire people with it. You know, government workers like cops and teachers. Invest it in our infrastructure. Or if tax policy's your only option, give most of the breaks to working people who will spend what they get

So why did Democrats choose this approach, rather than another? I might as well program that into my computer as a hot-key function, since the question needs to be asked so often. Could there be a Long Game here that involves cuts to Social Security?

That's speculation. But it wasn't very comforting to watch Sen. Dick Durbin playing the class-war game against Sen. Jon Kyl, since the once-reliable Durbin has started pushing aggressively for needless and harmful Social Security cuts.

The Long Game

EIther way, this proposal opens up avenues to a lot of unpleasant possible outcomes in upcoming negotiations. Here are a few of them:

Republicans could accept the tax cuts, but refuse the tax hikes for millionaires. If the Democrats cave on that issue, Social Security's Trust Fund will be funded with even larger money transfers from the overall Federal government's budget. That's a breach of the Trust Fund's firewall, which hadn't occurred in the program's 75-year history until last year. That's when Democrats, led by President Obama, introduced the payroll tax cut.

Which leads us to the next danger ...

Republicans could accept the tax cuts but insist that the Trust Fund's shortfall not be covered by general funds.That would turn Social Security's mild, easily remedied long-term imbalance into a more urgent problem -- which is just what the anti-Social Security crowd wants. That opens the door for politicians from both parties to raid the Trust Fund's $2.6 trillion surplus for other purposes.

Republicans might insist that some percentage of the 'tax cut' be invested in private Social Security accounts. Republicans have been trying to privatize Social Security for a long time. These hostage negotiations budget negotiations could give them the chance to finally get their foot in the door on that topic.

Democrats might 'compromise' on the COLA reduction, a Social Security benefit cut that both the White House and some other Democrats (including Dick Durbin) have been pushing all along. They call it an 'adjustment,' but their proposed method for calculating cost of living (COLA) adjustments is a benefit cut, pure and simple, that would lower an already-inadequate formula and take money out of people's pockets. It will probably be revived in these debates.

Fit to Be Tied

Where does this all leave us, the public? It leaves us in a position where it makes sense to call your representatives in Washington to push for this proposal - because the economy can't take the hit that it would take if this 'cut' expired, because the middle class needs the break, and because the unemployed deserve an extension in unemployment insurance.

But it also leaves us - some of us, anyway - frustrated as hell with a political system that forces us to choose between the inadequate and the insane. With regrets, for the moment I'm going with inadequate and backing this bill.

But if the Democrats want applause for this, they're going to be disappointed. I think I'm going to listen to that old Peggy Lee song instead. You know the one I mean, don't you [2]?
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Here's the conversation with Thom Hartmann. He sets it up with a good overview, and we start exchanging thoughts about 2:45 in: