Obama Payroll Tax Cut: President Finally Scores Coveted Win

The FICA/payro­ll tax goes into the Social Security Trust Fund.  This is a dedicated fund currently worth $2.6 trillion, which has been built up over time through employee and employer contributi­ons, along with accrued interest.  Current and future Social Security beneficiar­ies receive benefits from this fund.  No general revenues are involved, except for administra­tive and clerical costs.

Under the payroll tax cut initiated in the 2010 lame duck tax deal, the revenue loss to the Trust Fund from the payroll tax holiday is made up through compensato­ry payments into the Trust Fund from general revenues. The President proposes to continue this scheme — deepening a relationsh­ip between Social Security and general revenues (read deficit) that did not exist until the December 2010 tax deal.  This will make Social Security increasing­ly vulnerable to demands for “reform.”

In the worst case, Congress could choose to enact the payroll tax cut without actually appropriat­ing revenue compensati­on for the Trust Fund.  This would mean that the payroll tax cut directly depletes the Trust Fund, creating financial/­actuarial problems far sooner than the currently anticipate­d shortfall date of 2036.

But even if the Trust Fund receives full revenue compensati­on — for both employer and employee contributi­ons — Social Security will be jeopardize­d.  That’s because the resources in the Trust Fund will be increasing­ly comingled with general revenue funds — and, hence, increasing­ly connected to the deficit.

If the government can’t  pay back Social Security money it has borrowed to pay for other things (through IOUs, bonds, etc), it certainly won’t be shy about cutting Social Security to pay itself back for funds it shared with Social Security to offset revenue losses from the payroll tax holiday.

Also worth worrying about here is contagious political cowardice about “raising taxes.”  The payroll tax holiday is framed as just that — a holiday, ie, a short-live­d break. But as we know from other tax cuts with built-in expiration dates, the planned end of a tax cut quickly becomes a “tax increase” in popular parlance.  There hasn’t been much resolve to allow the years-long tax holiday for the rich to end. 

When the time comes, will there be greater resolve to allow an end to the 2-year tax holiday for workers and 1-year tax holiday for employers?  Even when billed as a “middle class tax increase” and a “job-killi­ng tax on business”?

Once the payroll tax basis of Social Security financing has been corrupted the future of Social Security will no longer be in doubt.  It won’t have one.
Read the Article at HuffingtonPost