Aside from the title, I agree with this editorial. There has been an overreaction on the left to the idea of the payroll tax holiday. It's sound policy. Having said that, I also agree with Warren Mosler, who thinks the cut in the final bill was too paltry and probably should have been revenue neutral to keep the Republican Congress from deciding we need to "pay for it" later with SS cuts.
I would feel better if we at least had a President who was on board with our monetary reality, but Obama appears to be obliviously mired in the the Washington Consensus.
Reality Check: Why Truth Will Protect Social SecurityMyths and misconceptions about our best-loved program only add fuel to the critics’ fire.It is clear from the comments on our last piece that we might have raised more questions than we answered. Above all, we want to make clear that when we discuss the funding aspects of the Social Security program, we are doing so in a way that is designed to safeguard it, not eliminate it. We believe that fictions are not necessary, because the truth will protect the program better than distortions, however well-intended. Enemies have lied enough; supporters do not need to battle fictions with more fictions. Here we will deal with a dozen issues surrounding the proposed payroll tax holiday, and illustrate why we do not believe that the holiday is a danger to the program — as long as we understand the facts.
1. Social Security Has Deep Support. Social Security is consistently counted as America’s most popular program. It lifts millions of seniors out of poverty. It provides benefits to widows, dependents and persons with disabilities. It has never missed a payment due. It is a federal government program, and as such has the full faith and credit of our government standing behind it. There is absolutely no reason to believe that it would ever default on its commitments. Its promises are as secure as any promises made anywhere in the world. One of the things that makes it so popular, and hence safe from political interference, is that it is essentially a universal program — Congress determines eligibility requirements. It has no means tests, so unlike “welfare” programs it is available for poor and rich alike. So it commands political legitimacy in a way that welfare programs do not.
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4. The Payroll Tax is Unpopular. In spite of the defense by well-intentioned, albeit misguided, liberals, no one really loves the payroll tax. It is the most burdensome federal tax for 70% of all Americans. It adds to the cost of employing American workers — making it hard to compete in a global economy in which many of our competitors have no equivalent business cost. In most nations, a public pension for retirees, as well as social protection for dependent youths and people with disabilities, is not a cost imposed on business. Rather, it is a cost born by society as a whole. In America we impose a cost on employment — both employee and employer — that is not typically born by our competitors. Just as in the case of imposing health care costs on employers, the US almost uniquely puts barriers in the way of employment. Social Security alone adds 12.4% (half each on employer and employee) to employment costs.
Further, the tax is poorly designed because it is regressive, with much lower tax rates on high income earners. It also taxes only employment income. This is extremely problematic in a nation in which the share of wages in national income has been declining on trend and is projected to continue to decline in coming decades. While we do not endorse such projections, we wish to point out that these have a lot to do with the projections of future financial “shortfalls”. In addition, as income becomes more unequally distributed, more employment income at the top becomes exempt from the tax — another reason for projected shortfalls. Again, we do not endorse the projection, but it provides fuel to the fire of neocons who point to projected shortfalls in their argument that the program is financially unsustainable.
Our point is that a payroll tax cut reduces employment costs, will restore ’spending power’ and, by helping households to make their mortgage payments, will help to fix banks from the bottom up. Maximizing employment and output in each period is a necessary condition for long-term growth. A payroll tax reduction helps to mitigate the impact of rising unemployment. So even on the conventional accounting grounds that today’s Social Security Trust Fund will have “shortfall” (to reiterate, a position which we do not endorse), full employment provides greater tax revenue to the government, which will shut down these discussions about Social Security’s “affordability”.
5. Tying Social Security to the Payroll Tax is Problematic. Even if we strictly stick to conventional understanding of government finance, it makes little sense to tie the program’s fortunes to the payroll tax for the reasons enumerated above. The tax base has been falling. The tax is regressive. The tax helps to make America uncompetitive. More importantly, the tax is almost unique among federal taxes — it is “dedicated” to a single program. That allows both “money’s worth” (comparing taxes paid to individual benefits received) calculations as well as calculations of “Armageddon day” (when revenues fall short of benefit payments). It also has led to completely unnecessary tax hikes over the years, from a tax of about 2% of wages on the parents of baby-boomers to the current 6.2%. These current tax rates have nothing to do with current benefit payments — Greenspan pushed them up far beyond what was necessary on the argument that we needed “advanced funding” for benefits that would be paid 50 or 75 years into the future.
By contrast, there is no dedicated military tax. Imagine tax policy that would try to increase taxes today on the argument that we will need to increase military spending in 2075. It would be rejected as nonsense. In fact, no one wastes time trying to calculate the defense spending “shortfall” through the next 75 years, let alone “infinite horizon” shortfalls (as is done by inter-generational warriors in the case of Social Security). Too silly to imagine. Without a “dedicated” payroll tax, such calculations would never be done because they could not be done. A “hypothecated tax” supposedly designed to safeguard Social Security’s long-term viability, then, actually provides the political means to destroy it.
http://www.newdeal20.org/2010/12/20/reality-check-why-truth-will-protect-social-security-30569">more...
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