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Posts tagged “Payroll Tax

Fuzzy Math & the Payroll Tax

There I go again...

If there’s one thing we should have learned from this recession, it’s that politicians may not know how to fix it – but they sure know how to play politics with it. So, you’ll pardon me if my eyebrows arched up when the Great Obama proclaimed the House’s refusal to go along with the payroll tax compromise was “stealing $1,000 from hard-working middle class Americans.” The President has told some whoppers during his time in office (seems becoming President imbues the office holder with that ability), but where on earth did he come up with that number?

The compromise reached in the Senate only covers two months. Given the typical American earns $34,720 a year and we’re talking about 2% of pre-tax income, that $1,000 seems a pretty big number. So I ran some quick calculations and didn’t come near the $1,000 promised by the President. Over 8 weeks, the typical American would see a “whopping” $106.83 extra in take-home pay – or $13.35 per week. I don’t know about you, but $13.35 doesn’t buy me very much. It won’t fill my gas tank. It also doesn’t fit the bill on the “What $40 Means to Me” White House website. Even the TWO months of extra take home pay wouldn’t cover ONE month’s cell phone bill. So, I thought that perhaps the President simply got the two month compromise bill and the extra cash from a full year of the payroll tax reduction confused (could happen; I’m sure he’s busy fielding calls from Michelle about how sunny Hawaii is right now). Nope, wrong again – that only comes to $694.40, or about ½ of 1 month’s mortgage payment. Could it be he was talking about the top-end earner under the plan, the guy making $110,000 a year? Not really – he still only comes home with an extra $338 in his pocket over the course of the compromise. (See chart below for details)

While the extra take-home money is welcome by pretty much everyone, I don’t think if people stop to consider the implications of this tax cut they’ll be so anxious to get that extra $13 or so in their pockets. Hey, here’s a novel idea, one that gets the same amount of money into everyone’s pockets without annihilating the Social Security system: why not pass an income tax cut for everyone earning under $110,000 per year? Too simple an idea? Too broad based to get real support? Probably.

In the meantime, I’m not sure what they’re smoking during these White House – Senate confabs. But they better legalize it before Eric Holder catches a whiff.

Payroll Tax Reduction

Don’t Pass the Payroll Tax Cut

FDR Signing the Original Social Security Act

Yesterday, the House of Representatives may have given the American people an early Christmas present – although the majority of my fellow citizens won’t realize it and (urged on by the President) will cry bloody murder. And yes, the motives of the House members are hardly pure. Those are certainly little more than angling for political gain. But the result is the same; an end to the insanity that is the payroll tax cut.

It isn’t that I’m opposed to tax cuts, in general principle. Anything that reduces the inflow of money from the private sector to the public is usually a good thing. But the consequences of reducing this particular tax levy amount to far more than the few pennies saved by the average taxpayer. Why? Because this is a targeted tax, whose revenue is designed purely to keep the Social Security system afloat.

Okay, some background here. The payroll tax amounts to 12.4% of the earned income of every wage earner in the country, up to $100,000. Of that, you normally pay 6.2% and your employer pays 6.2% (unless you’re self-employed, in which case you pay the full 12.4%). For 2011, Congress and the President reduced the amount paid by employees to 4.2%. That cost the Social Security system $117 billion. Now, here’s the rub: most people think there’s this massive social security trust fund, into which new revenues get deposited and from which existing current beneficiaries receive their monthly stipend. Reducing the amount coming for a year or two won’t matter, because the trust fund is earning interest on past deposits and there is plenty of time to make up the current shortfall. The reality is there isn’t a trust fund. There never was one; there never will be. Rather, the money you pay in is turned right around to retirees. Smart people realized that the system as it existed was untenable back in the 80’s; they worked out some changes in the ways benefits are paid and increased the payroll tax. Depending on who you talk to, the system was saved from insolvency until 2037 or 2052.

Except the $117 billion that came out of this year’s Social Security funding left us with an $83 billion shortfall, either 26 or 41 years before it was supposed to happen. If the payroll tax remains at 4.2% for this year, the CBO expects the shortfall to top $105 billion. (Actual reduction in revenue amounts to approximately $120 billion). The folks in the Senate came up with some neat trickery to “pay” for the reduced payroll tax, mostly relying on forecasting budget cuts 10 years down the road to pay the difference. That’s not exactly a reliable funding formula, but it is what passes for budget restraint these days.

What I find really amazing about the whole thing is the way Democrats – supposedly the guardians of the Social Security system from all assaults – have caved on this issue. Most of them probably haven’t realized yet that by breaking the essential funding formula created by the original Social Security Act and relying on general revenues to keep the system solvent, they’ve subjected their sacred cow to the whims of future Congresses. I can’t imagine they actually thought through the idea that Social Security is now on the general budgeting table, open to political negotiation on funding – and payments.

I think most people realize that Social Security needs to be revisited, if for no other reason that retirees are living longer and collecting more. Pro-rating payments, delaying the official retirement age, means testing, even incorporating private retirement accounts should all be on the table. But if Congress continues reducing the inflow of funds in to the Social Security system, the idea that we can address the topic later rather than sooner will be gone.