Wednesday, June 22, 2011

USA Today: Payroll taxes raid Social Security

USA Today
argues against an extension of the payroll tax holiday,

The argument for cutting the payroll tax in the first place — and Summers' argument now — is that the fragile economy still needs stimulus, and boosting take-home pay for virtually all working Americans is an effective way to do it.

Don't be fooled. What is billed as a stimulative cut in payroll taxes is really budgetary malpractice on the order of diverting money that's supposed to go into your 401(k) account, or your kid's 529 college savings plan, to pay for current expenses.

It would only make sense as part of a broader accord to stabilize Social Security for the long term, which so far has proved too politically unpalatable for either party to swallow.

Absent such steps, extending or expanding the payroll tax cut would just add to the nation's debt problems and further weaken the Social Security system just as the program faces unprecedented pressures from retiring Baby Boomers. It's the height of irresponsibility.

Personally I'd be more open to a payroll tax cut if I thought it would actually work. (I'm a little more open to an employer-side cut than employee-side, although I don't think many employers will make a long-term hiring decision based on a small short-term reduction in labor costs.)

I buy USA Today's argument that payroll tax cuts covered up with general revenue transfers undermine the notion of a self-funded Social Security program, although what we're seeing now isn't substantively all that different from the so-called "raid" on Social Security we've seen over the past three decades, just a little bit more overt.


WilliamLarsen said...

In 1935, there was no payroll tax and the savings rate of the worker was higher than today. In 1940 the savings rate was over 20% and the payroll tax was 2%. By 1950 the payroll tax was 3% and steadily increased all the while the U.S. Savings rate decreased. By 1990 the payroll tax had hit 15.3% and the U.S. Savings rate was under 5%.

It does not take a rocket scientist to see the trend over 74 years. As the payroll tax increased, U.S. savings rates declined, mortgage terms increased from 10 to 30 years, down payments went from 25% to 5% and in some cases 0% down.

We took current savings from workers in order to give to SS-OASI beneficiaries, increasing the economic growth in the past. this is identical to the cash for clunkers which took future car sales and brought them forward; first time home buyers credit that brought future sales forward; Energy tax credits that took future window sales and brought them forward. In the end did these programs produce more economic growth or did they simply re arrange individual purchases in the time line of life?

We are in a mine field. The way you get out is to retrace your steps. This means what caused our economic mess must be reversed. However, we are not doing that. Instead congress is looking at raising the payroll tax, making changes (Cuts) to those under 50 and doing the same thing that created the mess we now have.

The current generation of beneficiaries were able to save far more of their wages due to lower payroll taxes and they are receiving far higher benefits than their collective payroll taxes could support => the problem SS-OASI faces today.

If Social Security is well funded and designed,then eliminating the payroll tax for all workers in exchange for no future SS-OASI benefit would do no harm. I would rather take my money now than to continue paying into a ponzi scheme. Ever see the movie "The Money Pit?"

JoeTheEconomist said...

What people are missing on both sides of the discussion is that business wants not only low taxes but predictable taxes that it can price into its goods.

The constant tinkering with the taxcode is destructive to jobs because business can't project its costs. Even when you cut taxes, you haven't helped create jobs if businesses assume that they are going back up an undermined amount.

WilliamLarsen said...

Joe, you are 100% correct. The fact there is so much discussion about savings Social Security and securing Medicare for future generations has to bring fear to many corporations. These two programs are supported by dedicated tax revenues only. To make no changes to these programs would require the SS-OASI/DI tax to go to about 20% from 10.6% and Medicare tax rate from 2.9% to about 7% over the next two decades. Labor costs from the payroll tax would be over an 80% increase in the tax. Clearly this is a job destroyer.

As you pointed out, we need consistent taxes that companies can build into their cost structure.

The only problem is, will the 118 million potential voters under age 46 stand up and speak out as opposed to the 58 million boomers and 43 million seniors?

JoeTheEconomist said...

William, You have some interesting points here. I would like to catch-up with you offline. My email is JoeTheEconomist (AT) Gmail. xxxcom (strip out the x's). Your last paragraph needs a blog piece by itself....

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