Obama: Payroll tax cut disguised as an income tax cut disguised as a payroll tax cut

A member of my family who will remain nameless thinks that if chicken-fried steak is good – and let's assume it is – that chicken-fried-steak-fried-chicken would be even better. Regardless, the incoming Obama administration seems to have a similar attitude toward cutting payroll taxes to stimulate the economy, at least according to a story in this morning's Washington Times.

I've already argued in the WSJ that President' elect Obama's proposed tax cuts – the ones that go to 95 percent of the population, according to the campaign phraseology – was really a cut in Social Security payroll taxes. The tax could would equal 6.2 percent of earnings – the employee share of the 12.4 percent Social Security tax – up to maximum earnings of $8,000 per year, for a total tax cut of $500 per person.

But the tax cut would be in the form of a refundable income tax credit based on payroll taxes, meaning that in effect income tax revenues would be used to compensate the Social Security trust fund for any losses.

But this morning's Washington Times article goes further: according to the Times, the Obama tax cuts would not – like other refundable income tax cuts – be payable as a, well, refund when people file their taxes. Instead, Obama's planners want the tax cut paid out a little at a time through every paycheck – as a reduction in payroll taxes.

This reminds me of one of those M.C. Escher prints where the stairs go around and around until they meet up at the start. There is no reason other than to obscure the accounting not to simply call this a payroll tax cut with losses to Social Security financed through income taxes.

But calling it that might draw too many similarities to President Bush's 2005 personal accounts plan, which most Democrats condemned in the strongest possible terms. Under Bush's plan, workers could take around a third of their Social Security taxes – in effect, a payroll tax cut – and invest that money in a personal retirement account. Payroll tax reductions to Social Security would be covered through general revenue transfers in the short term. This was condemned as weakening the system and it was pointed out that there were no income tax surpluses to transfer, meaning that the plan would require new borrowing. Once account holders retired, however, they would accept a reduced traditional Social Security benefit; this would allow transition borrowing to be repaid.

The Obama proposal is effectively the same, except that the payroll tax cuts would be spent, not saved, and that there would be no means of repaying the tax cut later. In other words, the Bush plan had temporary borrowing and additional saving for retirement, while the Obama plan has permanent borrowing and no additional saving.