Fiscal Cliff Deadline Looming: Social Security & The Payroll Tax Holiday? How To Tie Republican Ideology In Knots.

December 30, 2012 . . . NOTE:  This posting is a republication of a piece I wrote in December 2011. It has application to the present “fiscal cliff” negotiations that some believe will result in an agreement later today.

One of the more critical questions in these talks is, of course, the perennial one: How to address Social Security and its substantially ginned up “crisis.” The President has already conceded to the GOP by accepting an inflation indexing of benefits that differs markedly from the past. Called chained CPI, the likelihood is strong that social security benefits would drop over time. (Unfortunately, apparently no discussion has taken place of many social security economists’ preference for continuing to develop a CPI indexing system for the elderly, a task that has been ongoing for some years now.)  Also, another matter facing these reluctant GOP negotiators is the payroll tax holiday. That too is discussed in my December 2011 article below.  Really, little has changed in the parameters of the discussion.

I try to use the GOP’s own supply side belief system and their anti-tax stance against them, and offer ways in which progressives and plain old moderates can do so. See what you think.

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Originally posted Dec. 11, 2011

The Republican party, whose members adamantly oppose tax hikes, has found one they really and truly want to promote.  How?  By not extending the 2011 Social Security payroll tax holiday, they would, in effect, raise it by about 50%.  And note, most American households pay less in income taxes than they do in payroll taxes dedicated to the Social Security trust fund, so the reduction from 6.2% to 4.2% of this tax in 2011 was a healthy boost to their pay checks.  Also, it exclusively benefited the working poor and what’s left of the middle class since, due to a longstanding wage cap provision affecting Social Security taxes, it applies only to those earning less than a very middle classy $106,800 this year.  Employers, by the way, match these taxes, and notably, the 2011 payroll tax holiday did not includethem; they pay an excise tax of 6.2% on wages paid (as well as 1.45% that is dedicated to Medicare, which also was not reduced for employees either during the holiday). . .

Finally, although a controversial subject, the looming “social security crisis” being chicken-littled nearly everywhere is primarily based on inaccurate understanding of the trust fund and on ideological grounds. Relatively easy fixes exist, short of raising the retirement age or radically slashing benefits, to remedy any crisis that might ever emerge. The trust fund has a still growing $2.4 trillion surplus, and that money is dedicated by law to pay benefits. If there is a crisis, it’s in the Medicare Trust Funds and in high health cost inflation, but, for this article, let’s assume a Social Security “crisis” scenario is valid, paramount, and impending, as Kyl, most of the GOP, and some Democrats believe.

“Who lit that fuse?” asked the senator.

So, where’s this all stand? Last week, the Senate voted down each parties’ proposals for an extension of the payroll tax holiday into 2012, with the Democratic version increasing the amount of the tax savings. Both parties’ bills included different offsets to fund the proposals, Democrats, a 3.25% surcharge on greater than million dollar incomes; Republicans, by cutting safety net programs like Food Stamps, and others of their now predictable spending cuts. So, the extension failed, bring with it a virtual tax rise unless the parties can get together and produce a compromise. Yet, the GOP did put forth a proposal to keep the holiday in place through 2012, did they not? Well, the GOP proposal was defeated – 20 yeas to 78 nays – by its own party as only 20 GOP senators voted for it. The others, 26 in all (McCain not voting), almost across the board, believed that the holiday ought to end outright on January 1, 2012. So, there is the cabal of Republicans against the payroll holiday in principle, varying from “it doesn’t create jobs” to simple nastiness.

Yesterday, Democrats, through Pennsylvania’s Senator Bob Casey, offered economically well-calculated and politically savvy compromises that will force Republicans to demagogue down a mere 1.9% surtax on incomes above a million dollars (down from the initial proposal of 3.25%), and which extends only 10 years. In return, the Dems proposal cuts the payroll tax holiday tax break from 2011’s 4.2% to 3.1%. Despite the cut, if enacted, the new rate would, on average, put approximately $1,500 in America’s working families’ budgets. It’ll be delightful to see how the GOP maneuvers around this one – they’ll be seen as again pushing reduced taxes on the very wealthy while increasing taxes on all American working families.

“The payroll tax holiday has not stimulated job creation. We do not think that is a great way to do it.”

With this, the senator may have unwittingly opened a door for Democrats and progressives to, in one package, lower taxes on most Americans and small to middle sized businesses, ensure the viability of Social Security, and increase taxes on more highly paid wage earners. How?

All the above can be accomplished by remaking the Social Security payroll tax (i.e. FICA – Medicare tax), moving it from a regressive (or flat tax) system to a progressive system, and doing so in a way that puts the GOP in an ideological and policy-making knot. In metaphor, the GOP can be hoist on its own ideological petard.

Nonetheless, as of last night, a fight over extending the wage earner Social Security tax holiday has become the Congressional battle du jour, de la semaine, or other French phrases. Both proposals shot down for starters. Nonetheless, this might be good for Democrats if, for now, they move off the 3.25% surtax, as worthy as it is, and hide some of this “surtax” in a FICA tax overhaul proposal that may isolate the GOP in dangerous political territory in the hunt for 2012 independent voters. The appearance of “backing down” again to the GOP on millionaires’ taxes would be satisfactorily sanitized inside a hugely popular Social Security program. And in the end, a FICA tax overhaul to a progressive tax would appeal to most Americans, who, after all, occupy the very income levels that a progressive Social Security payroll tax would help the most, and simultaneously would collect increased tax revenue from the upper 10%.

The positive effect on personal income of this year’s 2% break was large, especially since the payroll tax is presently regressive (at least at the time it is paid, if not in benefits received later). Therefore, prior to 2011, when the social security tax was 6.2% it more negatively affected lower wage earners than higher wage earners due to the percentage of income that certain goods and services drain from family budgets at differing income levels. Poor working families, for instance, spend a larger percentage of their income on transportation to and from work than do higher income families, even if the dollar value of their subway tickets are the same $40 per week.  Known generally as Engel’s law, in general, the same effect is true for many items, such as food, shelter, health care, renters insurance, etc.

Regardless of the helpful economic effect of the 2011 holiday, though, the resulting 2011 Social Security tax remained a flat tax, and, as we saw above, flat taxes like these do not “equalize” as nearly all congressional Republicans, Herman Cain, Rick Perry, and some Democrats ardently believe. Their arithmetic is all linear. The distribution of flat taxes and their family budget consequences among different income levels, however, are manifestly not linear.

As part of a “fair and balanced” view of a flat tax, here’s a counter-example that presents it in a different, friendlier, light. Overall, the income gain from this year’s payroll tax holiday averaged approximately $1,000 per worker, but that amount when it’s an abatement or a refund is regressive in the best way:  on a percentage of income basis, it boosts lower earner incomes in the lower 20% of earners more than those at the $106,800 taxable wage ceiling. For instance, lower income earners who receive a $500 Social Security tax break this year can do more to meet basic needs (and perhaps have some discretionary funds left over) than a $1,000 break for those better off who already easily meet these needs. That group, in fact, may actually buy things just for the joy of it, like televisions, row boats, tires, laptops, and funny costumes.

Yet, despite this reverse regression boost, in the end, a flat tax does more proportionate damage than not. As we’ve seen, it especially hurts lower income households’ living standards, and regrettably, that group of working poor has experienced virtually no net income growth for decades. Finally, and importantly – although mildly debated by economists – the employer portion of the FICA tax system is passed on by employers to employees through wage reductions, benefit cuts, etc. So, as a consequence, where employees’ face this this they are potentially being assessed up to double their own FICA taxes, including the Medicare portion of 1.45%.

Senator Kyl’s framing of the payroll tax extension as a “job creation” issue, as inapt as it was, simply passes along another of the GOP macroeconomic mantras of this era. Remember, their almost religious beliefs:

1. Eliminate nearly all taxes on “job creators,”
2. Decrease spending in all discretionary areas, but defense,
3. Cut “entitlements,” root and branch, as much as possible, just short of being publicly hanged in retribution, and
4. Never agree to spending “offsets” for tax cuts; remember ALL tax cuts “pay for themselves” with increased economic growth.

(Let’s put aside for this discussion, 5. Decapitate financial and business regulation, and, if legally possible, regulators themselves.  6. “Let’s hang Ben Bernanke, in Texas, at the Alamo, on July 4th.” 7. Reinvigorate “In God We Trust” by adding three more “Trust”s  8. Deport those with unusual accents, 9. Invade Kenya, seize all birth records, then go home. 10. . .   oh, never mind.)

The GOP’s, “job creation” argument in nearly every case, not merely the payroll tax holiday, arises out of supply side economics, the granite hard foundation of their tax policy. Supply side policies typically stress tax reductions primarily to benefit these “job creators,” those well-known 1 to 10%ers who su[pposedly provide the “trickle down” of income to the lower 80%. But that’s not all, Republicans, particularly the new crop of Tea Partiers they all fear, rail around the clock, on principle, against taxes qua taxes, i.e. taxes as an idea, taxes on anyone for anything at anytime. That’s only a microscopic overstatement.

Yet, inexplicably, here’s a tax cut – extending the payroll tax holiday – that is (1) a non-job creator, and (2) in desperate need of spending offsets. What are they smoking? Certainly, one would think, unleashing the dollars on a recession-prone economy that would normally go to the Social Security Trust Fund would help spur production, and thereby create jobs, the very supply side goal sought by Republicans. Though they deny that jobs are created by a payroll tax reduction, this belief violates their foundational principle that all tax reductions “pay for themselves” by spurring economic growth. To Republicans, all tax reductions are, therefore, supply side in nature. So what’s the problem here? Why on earth oppose this one?

Here’s where it gets tricky. Understanding their supply side about face is a clear path to attacking the GOP on its flank, and subjecting them to an unwanted limelight for awhile, perhaps until the morning of November 7, 2012. It’s, of course, another instance of oppose anything Obama or Democrats propose, but that’s not all. The Kyl-GOP position on ending the payroll tax holiday is akin to shooting themselves, and a vast army  of their constituents, in the ideological foot by in effect urging a tax increase that will directly take billions out of families’ wallets, and giving them back to the federal government’s “entitlement” programs, which the GOP adamantly oppose. This is a real political bind for them.

Certainly, the resulting income transfer to government will affect their 1%ers’ bottom lines as well, reducing demand that translates into lower dividends, corporate profits, equity market prices, and incomes. When, in the absence of the payroll tax holiday, Americans’ discretionary income declines in 2012; those subject to FICA taxes will be paying 2% more salary to Uncle. So, for the GOP to take such a pro tax hike stance is a mystery.  And, What about their “tsax pledge”? Does not Grover Norquist oppose rescinding tax cuts or tax expenditures once they’re on the books? Finally, as Mitt Romney said about another issue related to the politics of lawn maintenance, “It’s an election year!” Why would the anti-tax, anti-government, anti-“entitlements,” pro Social Security privatization party want to be seen pushing a tax increase in an election year? Well, with a reform proposal, the Democrats can ask that on a daily basis and if done with one voice, I’ll betcha’ Boehner sheds tears.

If that’s not enough, here’s another GOP hot topic: Social Security itself. It’s solvency. They’re frightfully concerned about that. They do their arithmetic and discover that Social Security will run out of money any day now. What shall we do? Given the recent track record of the financial industry, their preferred choice of privatizing it via the equity markets, is a non-starter. And that’s really all they have. So, now, how do we shore up the program, this mammoth “Ponzi scheme”? Well, they suggest raising the retirement age (not so good if you work in the trades where muscles are involved), they suggest cutting benefits (not so good if you’re already destined to live on dog food in emergency rooms). They suggest everything short of deporting the elderly to Finland (Finnish is a hard language to learn). In Social Security reform, working Americans view them like a Republican in a punch bowl. Democrats can keep that pleasant image of the GOP in the forefront by actively battling them over a FICA tax overhaul that, through its progressive tax basis and no income cut-off. Republicans will find it hard to respond in a way that does not make them even more unpopular, particularly, I believe, among independents.

No, not that FICA!!

Senator Kyl, by tying the question to supply side economics through his use of the term “job creation,” may have invited an effective Democratic progressive flanking movement along these tactical lines:

In the continuing battle, Democrats and progressives might say,

“Yes, we share your concern about the payroll tax holiday. We hear your supply side concerns. But let’s also discuss the demand side, which is the other side of the macroeconomic coin. Low demand leads to less private sector revenue, less cash flow, less employment, and other things we all can agree need fixing. And, as you say, right now! It’s a Social Security crisis! Let’s not fool around any longer.”

Remember, the average American pays more payroll taxes than income taxes. And, as mentioned above, here’s the most important factor:  Social Security payroll taxes are regressive, like Cain’s 9-9-9, or Perry’s flat tax. Those two have already paved the way for Democrats to easily argue against another flat tax system, the funding of Social Security. The American public, by and large, now understands the idea of regressivity. That’s why 9-9-9 and flat tax ideas are, by and large, in the GOP primary garbage heap. Many more Americans now understand that a poor family pays a higher percentage of its income on food than a middle class family. So Mr. President, Democrats, progressives, ask Kyl and the GOP, “Can we both admit that such a regressive effect is a bad thing?” Publicly, where it matters, if framed in simple terms that appeal to the Democratic base and to independents, I’d dare Republicans to disagree without very negative polling consequences.

Push the GOP regularly with their own beliefs that extending the payroll tax, a tax cut, would be an example of their own supply side economic policy preference and guarantee economic growth.

Caught like this, however, in a snit for the Democrats’ attempt to hoist them on their own supply side petard, the GOP will suddenly care about Social Security in its present form, something rarely show-boated. This is where Democrats and progressives can tie them into knots.

“Well, yes, we too, as you well know, fear for Social Security’s future. We support your proposed payroll tax hike, and we applaud your courage in going counter to your tax-free economics. We also agree that Social Security needs immediate attention. Bu neither of us condone tax hikes on the middle class and poor, especially, as you frequently point out, in a time of weak economic recovery.”

“So, we propose solving both the payroll tax regressivity problem and the Social Security funding crisis problem in one big bipartisan package. We’ll start with your excellent idea of ending the payroll tax holiday as of January 1, 2012. We’ll both frame it as a ‘big solution for some big problems,’ giving you, the GOP, ample accolades for the original concept.” [Nudge, nudge, wink, wink]

Excellent!

Then, roll up their flank, and uncover the proposals:

1. To assure Social Security viability for a century or more, we propose erasing the present payroll tax income cutoff point. FICA will now be collected on all wage earners required to pay the tax regardless of income.

2. In addition, let’s transform the payroll tax from a regressive flat tax to a progressive tax with lowest rates for the lowest income wage earners and with proportionately higher rates for higher wage earners;

3. With a progressive FICA system and the wage cut-off point removed, we transform the employer FICA taxes on wages paid to a progressive tax as well. Progressivity, in turn, benefits small business owners, a goal we both seek.

All these benefits could follow, arising from both demand and supply side features of a bold overhaul of the Social Security portion of the payroll tax:

— a marked decrease in FICA taxes on most of the American public, three quarters of whom pay more in FICA taxes than in income taxes,

— a similar decrease in FICA taxes owed by small businesses, freeing up money for them to invest, thus enabling expansion and job growth, and

— a mechanism that will sustain Social Security for the long term by more efficiently, economically, and fairly spreading the funding throughout the wage scale on an income-earned basis.

And it is those poor and Mainstream constituencies who deliver GDP growth. Happily for all, they thereby increase incomes, private sector revenue, corporate profits, and, consequently, add to the wealth of the upper 10%, producing legal ecstasy for Republicans. By golly, it’ll trickle up!

If someone runs with this, how can the GOP resist it without uncovering their real motivations, their misuse of supply side economics, and their true goal: further undercutting the poor and middle class while enriching the upper class.

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