Democrats See an Advantage in Debate Over Payroll Tax

[alp227]

Source: NYT

After struggling all year for an economic message that resonates broadly with Americans in hard times, President Obama and Congressional Democrats have settled on one they believe can carry through next year’s election as they use a fight over payroll taxes to portray Republicans as defenders of the wealthy at the expense of the middle class.

With Mr. Obama leading the charge in Washington and political swing states, Senate Democrats have put proudly antitax Republicans in the position of opposing a tax cut for more than 160 million mostly middle-class Americans because they object that it includes a tax on about 350,000 people, those with more than $1 million in annual taxable income.

For now the legislative outcome is a draw. Late Thursday, the Senate voted 51 to 49 for the Democrats’ measure to further reduce payroll taxes next year for both workers and employers and to impose the surtax, short of the 60 votes needed. One moderate Republican, Senator Susan Collins of Maine, supported the measure. The vote was 78 to 20 against the Republicans’ alternative, extending the current tax cut, paid for by slashing the federal payroll.

The maneuvering suggests that the parties will agree to some continued relief before the current payroll tax cut expires on Dec. 31. But how much of a cut and how — or if — it will be paid for remain to be settled, with some in both parties saying that the tax break would further weaken the Social Security system’s financing.

Read more: http://www.nytimes.com/2011/12/02/us/politics/democrats-look-to-payroll-issue-for-upper-hand.html

[Psephos]

1. Playing political games with the funding of SS is reckless.

The payroll tax "holiday" should never have been passed in the first place. SS is in deep trouble already.

I'm all for a lasting, financially sound reform. This isn't the way to fix the economy or fix SS.

[MannyGoldstein]

3. In what way is SS in deep trouble?

It's got a $2.6 trillion and growing trust fund, and is fully-funded for at least 75 years.

(See mysig fot details.)

[Psephos]

4. The trust fund exists only as US government IOUs.

The actual money was borrowed and spent. The US Treasury must sell bonds to pay it back. The chance that historically-low, under-priced current interest rates will prevail when the time comes for repayment is vanishingly small. Instead, when interest rates rise and regress back to the historical norm, the Treasury will become enmeshed in a debt spiral (cf. Greece or Italy).

The Fed will explode the money supply to enable the US Government to buy its own debt, because there won't be many bids from outside the US. All that funny money will goose inflation; QE purchases are the funniest of them all. Inflation will rage. People will get their QE-enabled SS checks, but a chicken will cost $30 and gasoline will be $10. I call that deep trouble.

[MannyGoldstein]

6. That's true of all other T Bills too.

Sounds like a "we need to restore taxes on the 1% to the levels they were back when America prospered" problem rather than a Social Security problem. All TBill holders should be treated equally.

[Psephos]

7. I hear you there. :)

Still, I'm not counting on SS doing much for me in retirement.

[Samantha]

11. Here is the HUGE problem with your post

The United States Government does still continue to attract many investors in its Treasury investments, despite saying the opposite. This was even mentioned on CSPAN yesterday, and it still pays low interest on its debt, despite PR to the contrary. It CANNOT advertise itself to the world as the safest commodity in which to invest (which it historically has touted itself as) and default, yes, DEFAULT on its debt to its largest bondholder.

If you check the government stats (which I have previously posted here), you might be surprised to learn, that the biggest holder of the U.S. debt is not China, not Japan, but its DOMESTIC BOND HOLDERS. Number 1 debt bond holder includes the Social Security and the Medicare Trust Funds, yes, Medicare does have a trust fund -- we never hear about that do we? -- for a combined approximate amount of 5.3 Trillion Dollars. The United States government cannot default on 5.3 Trillion Dollars owed to its own citizens and still peddle its notes as the safest investment in the world today -- cannot be done. And neither can the slick politicians find schemes to whittle away at that debt repayment, for instance, Paul Ryan's voucher plan for Medicare or Rick Perry's plan to abolish Social Security, because to do so will adversely impugn its own reputation to the world. The citizens of this Country will make sure of that.

Additionally, there is another 3 Trillion Dollars owed to domestic bond holders by way of government pension funds (which is probably the holder of the Post Office's over payments), and if the politicians do not make that debt whole, once again, the whole world will be made aware.

The time when the United States Government can have it both ways is over.

Sam

[Psephos]

12. And here is the huge problem with yours.

In a word, you're living in the 20th Century.

US Treasury debt is no longer the "safest investment in the world." US debt has already been downgraded, and more downgrades are threatened. For every dollar the government spends, it borrows 40 cents...and rising. How long would your household last if you did that? More to the point, the only reason US debt continues to enjoy historical minimum interest rates is because other sovereign debt (especially in Europe) is melting down. That comparative advantage won't last long. The historical norm for US debt is between 5 and 6 percent, and it has been higher, most recently during the late 1970s. The US cannot currently pay that interest rate on its $15 trillion debt without bankrupting. So, we live under a sword of Damocles, and the thread is fraying.

Because the US dollar is the reserve currency, the US government can manufacture as many as it wants to service its own debt. Think about that. Let's say you owe $50,000 on a line of credit that's due in full on New Year's Day, but you only make $30,000. So, you write yourself an IOU, take it to the bank, and try to use that IOU as collateral for a $20,000 loan so you can pay all of your income plus the newly-borrowed $20,000 to settle the debt. (The numbers I chose reflect the actual ratios of government income to government budget debt.) Meanwhile, you don't say a thing about the $500,000 mortgage you cosigned for your cousin. That won't come due for a while, so no problem, right?

Do you think the bank is going to loan you money on your IOU to yourself? Only when you can print counterfeit money can a plan like this "work" and even then, it can only work as long as people continue to believe the money represents actual, tangible goods or services. As more and more people catch on there's nothing but air in those fake dollars, it costs more and more dollars to buy something real. You can see this happening right now on the growing price spread between world (Brent) oil and West Texas Intermediate oil (US domestic). Oil on the global market requires about a 20% premium if you're buying it with dollars. Soon it will be 50%...then 100%...and then...

As floods of dollars become increasingly seen as a scam by the government to pay real debt with fake money, interest rates will rise...which means that rising interest payments on the debt start making the budget deficit worse...which requires the government to print even more money to buy its own debt...which very quickly becomes what's known as an interest rate death spiral. Greece is in one right now, and Italy is about to be sucked into the vortex. There is no remedy for this except bankruptcy. The EU interventions will fail because (drum roll) they're trying to backstop debt with more IOUs. No real money involved, just fake made-up money.

So, to summarize, you missed the critical point in my earlier post. The US government, in short, will knowingly hyperinflate the dollar so that it can "pay" its debts with dollars that aren't worth much more than toilet paper. Technically, the books will balance, it's just that your SS check won't even cover gas to the bank to cash it, even if it's for a million dollars.

Money is a medium of exchange. I work an hour; you have a chicken. You want me to fix your lawnmower; I want to eat dinner. We trade goods using money that we believe represents actual things of value. Once the government starts flooding the marketplace with dollars that have nothing but politicians' words behind them, and everyone gets wise to the game, you end up with a replay of Germany in 1923.

Why do you think gold has gone up over a thousand "dollars" an ounce in the past two years? Actually, the price of gold hasn't gone up at all. The value of dollars has gone down. Same with oil. Soon enough, same with toilet paper.

Don't worry too much about the US dollar's reputation. It's already shot. No one on the planet believes anymore that the US government will or can pay its debts. Instead, it's just seen as a game of musical chairs.

[cstanleytech]

8. In general you are right however

if this is done right SS and the entire country might be better off if it causes the republicans to either pull their heads out of their ass and do the right thing for the majority of the american people or it gets them voted out of office.

[dkf]

2. I bet they land up adding to the deficit.

[Yupster]

5. Yes and two more big ones too

The doctor fix needs to be done by the end of the year and that will add tens of billions to the budget and the extension of unemployment benefits is also not a budget item so that will also add to the deficit.

Three huge deficit adders in a month.

[customerserviceguy]

9. I shudder to think

what we will trade off to the Republicons as a 'favor' for letting our side gut Social Security.

They must be laughing their asses off right now.

[kimsarah]

10. Just trust the Big O