September 12, 2011 09:05 PM UTC

Kiss Social Security Good-Bye

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• by: caroman

(But… but… tax cuts INCREASE tax collections! Because Reagan, that’s why! – promoted by ProgressiveCowgirl)

A key component of President Obama’s American Jobs Act is to cut in half the Social Security taxes paid by employees and employers.  This tax holiday doubles down the tax savings already in place for 2011.  

I have one question:  When do you think the economy will be sufficiently recovered for Congress to revoke this holiday and effectively raise everyone’s Social Security taxes?  During a GOP Administration if Obama loses in 2012?  During a second Obama Administration if he wins?

If you, like I, answered “Never”, then you get where I am going with this.  Obama’s plan to cut Social Security taxes will eviscerate the Social Security program.  And, I would argue, to no significant benefit to the economy.

 

First, a few clarifying facts.  Social Security is funded by wage withholdings on all employees which are matched by employers.  If you make $1,000 then $62 ( 6.2%) is withheld from your paycheck and paid to the federal government.  Your employer is also required to match this amount with a payment to the feds.  This happens on all wages up to $106,800.  (The cap has been steadily increasing over the years.)  In 2011, the employee’s portion of SS taxes was reduced by 2%, to 4.2%.  This 2% reduction translates to $20 less tax withholding, and more cash in the pocket of employees making about $50,000/year (or, $1,000/week).  President Obama’s plan is to reduce the SS taxes by 3.1% for employees, AND to also reduce the employer’s share by 3.1%.  So, employees making about $50,000/year would now have about $31 more in their paychecks each week.  Employers get to pocket the same amount.

Observation #1:  If you give a tax break and no one notices, does it matter?  

Raise your hand if you noticed the $20/week increase in your paycheck this year.  Bonus: Raise your hand if you knew that you were given a $400/person Making Work Pay credit on your 2009 and 2010 tax returns.

Perhaps the two biggest problems our economy faces right now are a lack of demand and a lack of consumer confidence.   Now, putting more cash in most people’s pockets is a great idea.  Most people will turn around and spend that money, thereby increasing demand.  And, they will spend that money when they see it in their bank account.  But, I argue that the psychological impact is far less if they get it in $31 drabs or in hidden tax breaks on their 1040’s, than if they got a check in the mail for $1,550.  (Rich people don’t care — those amounts are rounding errors and won’t be spent because they are already spending all they want anyway.)  Giving this type of tax break to employers is also just a waste of money.  They won’t hire any more people at $50,000/year just because they get to keep an extra $1,550.  So, even though the extra cash will be spent by those other than the rich, it does little to bolster consumer confidence when you don’t even realize you got this extra cash.

Observation #2: Tying this tax break to Social Security will destroy Social Security.

It’s true that the federal government has been raiding the Social Security fund to pay for general obligations forever.  But, the concept that we are paying into the SS system via our payroll withholdings and have earned our SS benefits when we retire is accurate.  Cutting SS taxes to allow for more spending today breaks this fundamental principle of Social Security.  And, as I noted above, when will this tax holiday expire and who will let it expire?  The GOP?  President Obama and the Dems?  Please.  We can’t even let the Bush tax cuts for millionaires expire.  So, this temporary tax break that few will notice may cause irreparable harm to the Social Security system.  Frankly, I didn’t think that my President and my Party would be willing participants in Grover Norquest’s vow to shrink government (including Social Security) to a size where it could be drowned in a bathtub.

SOLUTION:  Issue $1,500 Checks to Every Taxpayer, ASAP

Issue a $1,500 check to everyone who had a W-2, or filed a Schedule C (sole proprietorship) in 2010.  Maybe you could limit it to those who had less than a certain adjusted gross income (say, $500,000) in 2010.  How would your attitude (i.e., confidence) be after getting such a check?  I’m guessing you’d feel pretty good and might feel a lot better about most everything.  In fact, since we wouldn’t be giving a break to the employers, maybe we could increase that check to $3,000 for everyone.  Feeling even better?

In summary, President Obama’s plan to cut Social Security taxes is a bad, bad idea.  The relief it provides is too little to be noticed and won’t improve consumer confidence. And, it needlessly imperils Social Security.

Instead, write a large check to every worker in America ASAP and watch the economy improve immediately.