THE ISSUE: U.S. workers normally pay 6.2 percent on the first $106,800 of their wages into Social Security, but the president and Congress approved a temporary 2 percent payroll tax cut for 2011. That expires on Dec. 31 unless Congress and the White House can reach a deal. The president wants to extend and expand the tax break for another year.
To boost economy, should Congress extend the holiday on payroll taxes?
Pia Lopez: Yes, temporarily
In ordinary times, I'd oppose a one-year holiday on the tax that funds Social Security.
But these are not ordinary times.
With the 2007-08 recession, the U.S. economy lost 8.75 million jobs, the steepest loss since the Great Depression. To date, the economy has regained only about 2 million jobs.
These extraordinary times call for extraordinary measures.
The reality is that the vast majority of working Americans pay a greater share of their federal taxes as payroll taxes, not income taxes. The aim of a temporary payroll tax cut is to boost consumer spending to preserve jobs.
But simply extending this year's cut provides no new boost. That's why the president seeks to cut the payroll tax even further for workers in 2012 and extend the tax holiday to employers.
No tax cut pays for itself, however. We have to pay for the tax holiday so we don't weaken Social Security or add to daunting deficits.
Obama wants to pay for the 2012 tax holiday with a surtax of 3.25 percent on incomes over $1 million.
Nick Hanauer, a Seattle venture capitalist, has written an op-ed for Bloomberg News that explains why that makes sense.
"Since 1980, the share of the nation's income for fat cats like me in the top 0.1 percent has increased a shocking 400 percent, while the share for the bottom 50 percent of Americans has declined 33 percent," he wrote. "At the same time, effective tax rates on the superwealthy fell to 16.6 percent in 2007, from 42 percent at the peak of U.S. productivity in the early 1960s."
The surcharge, Hanauer concludes, would be "puny" in its effect on the highest-income Americans, but would help average workers immensely.
Republicans want to extend Obama's two-year freeze on federal workers' wages for another three years (to 2015) and cut the federal workforce by 200,000.
It's hard to see how that helps middle-class workers or the economy.
An alternative would be to scrap the cap on wages subject to Social Security taxes.
For example, before this year's tax holiday, everybody earning under $106,800 paid 6.2 percent of their earnings in Social Security taxes. A person earning $200,000, however, paid 6.2 percent on the first $106,800, and nothing on the rest or 3 percent of total earnings. That's not fair, and it is costly.
All earnings should be subject to Social Security taxes.
A payroll tax holiday is less than ideal. But letting it expire at this moment risks slowing a fragile recovery. Another year for the payroll tax holiday is the best of bad alternatives but only if it is paid for.
Pia Lopez is an editorial writer at The Bee.
Ben Boychuk: No, its irresponsible
Look, I'm all in favor of cutting taxes, maintaining low marginal rates, and keeping more of my paycheck. Not all tax cuts are created equal, however.
Extending the payroll tax holiday would be unwise at best.
Ordinarily, here I would invoke my favorite law the law of unintended consequences. But the consequences of extending the temporary payroll tax reduction are obvious and easily foreseen. To start with, it would undermine the fiscal stability of Social Security.
Pia and I have argued about Social Security before. I maintain it's a generational Ponzi scheme. Actually, it's worse, because at least in a Ponzi scheme, the mark can walk away. Social Security is a federally mandated shakedown.
Absent reform or privatization, the best that could be said for the New Deal-era program is that at least it has a dedicated funding stream. Social Security recipients actually paid something into the trust fund, as opposed to welfare recipients whose checks are funded by general income tax revenues.
Whether the payroll tax is 6.2 percent, or 4.2 percent, Social Security's obligations remain the same. Absent the necessary revenue, the federal government would need to fund Social Security through higher income taxes or by adding to the $15 trillion national debt through more borrowing. Bad idea.
Also, these temporary tax gimmicks almost never work. Remember George W. Bush's $600 rebate checks in 2001? Didn't move the economic needle whatsoever. His 2002 tax cuts, on the other hand, had a true stimulating effect and Democrats can't wait for those to expire.
Less obvious may be the effect the payroll tax break has had on the economy. That's because the effect has been imperceptible.
President Obama sold the payroll tax holiday last year as a new stimulus program. Vice President Joe Biden wrote an op-ed for USA Today in January promising that the cut "will put $112 billion into the pockets of 155 million workers, who will then inject it back into the economy, spurring growth and creating jobs."
Sorry, but it didn't work. Economic growth for 2011 has been sluggish at best, with annualized increases of just 0.4 percent in the first quarter, 1.3 percent in the second, and 2 percent in the third. Note, that's in contrast to relatively anemic 3 percent growth last year.
The word from Washington, D.C., is the Republicans in Congress are coming around to the president's view on the payroll tax holiday. If so, they're making a mistake by trading short-term political gain for a long-term liability. It wouldn't be the first time, but it would still be a grossly irresponsible move.
Ben Boychuk is associate editor of the Manhattan Institute's City Journal (www.city-journal.org/california).