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Payroll Tax Cut Ambivalence

Posted Nov 30 2011 8:30am

category_bug_politics.gif It tells you a lot about our corrupt politics that when Congress passed the payroll tax holiday in December 2010 in the same package as the extension of the Bush era tax cuts primarily benefiting the wealthy, the former was for a period of one year and the latter for two years.

So the rich folks are secure in their tax cuts for another year. But now that Congress has returned to Washington following the Thanksgiving recess, the payroll tax holiday that benefits the middle and working classes must be renewed by the end of December or return, in January paychecks, to the full 6.2 percent Social Security withholding - up by a third from the 4.2 percent in force during 2011.

On Monday, with President Barack Obama's imprimatur, Senate Democrats introduced a bill not only to extend the payroll tax holiday through 2012; it would also increase the cut to 3.1 percent or half the full deduction of 6.2 percent.

But wait, there's more.

This new bill would also reduce the employer half of the payroll tax on the first $5 million of taxable payroll to the same 3.1 percent as employees.

The bill proposes to pay for the tax holiday with a 3.25 percent tax on gross income above the first $1 million. I don't need to tell you how Republicans feel about a tax hike, any tax hike, on rich people.

In case you are wondering, Social Security is held harmless from lost revenue in this tax holiday as the money not collected and therefore lost ($67.2 billion in 2011) is recouped from the federal government's general fund.

And that's where I get ambivalent about this.

What bothers me is that until this tax holiday, Social Security funds have always been held in an account separate from the general fund. They still are. But now, with the shortfall due to the tax holiday being replenished via the general fund, that wall between the two has been breached and I don't find it hard to imagine/believe that Congress – Republicans in particular – would just refuse to reimburse Social Security in whole or in part.

This, obviously, would put Social Security at great risk for further attack from the political right.

More than at any time since Social Security's inception, it is a crucial factor for retirement. Real wages have not increased for more than a decade and will not do so any time soon.

Additionally, workers collectively lost trillions of dollars from retirement accounts in the 2008 crash, millions more have disappeared as home are foreclosed upon or drastically reduced in value and many unemployed will never recoup either their careers or salaries.

For more people than ever before, Social Security is crucial to workers' old age and it should not be put at risk by making it easy for politicians, many of whom have tried to kill the program for decades, to raid it.

President Obama supports continuation of the “tax holiday” and will be speaking in support of its extension and expansion in Scranton, Pennsylvania today.

Congressional Republicans at first rejected renewal of the cut, but are now mostly supporting it except for the part about taxing incomes larger than $1 million. (What else is new.)

Senate leader Harry Reid may bring the bill to the floor for a vote by Friday.

It is damned difficult in this horrid economy with a real unemployment rate above 16 percent, to argue against an additional $1500/year that the proposed 2012 holiday would provide an average family, up from an average of $1,000 in 2011.

But with each payroll holiday, each increase in it, each extension and each time the reimbursement is coupled to the general fund, Social Security is at greater and growing risk.


At The Elder Storytelling Place today, Johna Ferguson: Visitors

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