Posted by: SWL | December 9, 2011

Payroll Tax Holiday Does Not Benefit All, Hurts Social Security

President Obama, in a speech Tuesday, said that the battle over extending the payroll tax holiday is a “defining moment” for the country. With the US economy still sluggish, and homeless and unemployed Americans occupying parks and plazas across the nation – the payroll tax holiday is the most critical legislation Congress needs to pass?!?!

The payroll tax holiday was a bad idea initially; it is a bad idea to extend it now. Although I am in favor of tax reductions in general, the concepts and motives behind this and the negative long-term effects make the payroll tax reduction dangerous. Why?

* The payroll tax is not the federal income tax. The payroll tax funds Social Security. If millions of workers contribute an average of $1000 less per year into the Social Security Trust Fund, then Social Security has billions fewer dollars each year to pay out in benefits.

* Because this is not a decrease in federal income taxes, citizens will see no change in the amount of tax they owe on April 15.

* Extending the payroll tax reduction will not create jobs. The corresponding $1000/employee/year reduction in employers’ contributions to Social Security is not enough for a business owner to hire more workers. A small business with 10 employees would save $10,000, which will not fund an additional employee’s annual wage.

* Cutting the payroll tax does not decrease general federal revenue, so government spending can remain at current levels. That is likely why President Obama could support this when he has opposed every other tax reduction.

* The President wants the proposed extension of the payroll tax holiday to be funded by a 2% income surtax on millionaires.
— Obama proposed the same surtax to partially fund his jobs plan and it was voted down by the Democrat controlled Senate.
— Since the surtax would be part of the income tax code, it would be easy to keep it in place later even if the payroll tax reduction was eliminated. This appears to be a back door route for the President to achieve a permanent income tax increase on wealthy Americans. (Obama continually speaks of “paying their fair share”, but this defies the definition of “fair”. Click to see my comments on this concept near the end of the July 22 post.)
— Would funds collected from this surtax actually end up in the Social Security Trust Fund?

* Many Americans have not benefited from the current payroll tax holiday:
— Those receiving unemployment, welfare and Social Security benefits.
— Retirees receiving private business pensions.
— Employees of the Postal Service and long-time federal workers who are under different retirement systems. Other American workers are receiving about $60 a month from the payroll tax holiday, with the guarantee of full Social Security benefits in the future. Postal and federal workers are still paying their full contributions to their retirement funds.

* President Obama says the debate over the payroll tax holiday is “a make-or-break moment for the middle class”, that not extending the holiday would be a tax increase on the middle class. What about those in the lower economic class? If they work, they pay the payroll tax even if they do not have income tax withheld. It is interesting that in the 2012 election cycle, the President is ignoring the poor.

In his speech, the President said America works best when we all “play by the same rules”. I agree with the words, but apparently the President and I do not use the same dictionary.
— The current payroll tax holiday has benefited some Americans but not others. Using “the same rules” would mean somehow providing $1000 more net income this year to everyone.
— Obama’s proposal would raise taxes on the wealthy. Using “the same rules” would mean the same tax rates with only deductions that are available to all. (Sounds like a flat tax.)
The President’s rhetoric sounds good on emotional and theoretical levels. But his proposals for legislation do not line up with the ideals in his speeches.

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