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Payroll tax cuts rob the poor to feed the rich

Washington's long-term nostrums all involve preserving the status quo for the Wall Street class. Cutting Social Security and Medicare? That's on the table. Rolling back tax benefits for the wealthy? That's not.

June 19, 2011|Michael Hiltzik

The silver lining in economic crises, if there is one, is that they can lead us to reexamine the flaws in the capitalist system and chisel out the rot.

But what explains the headlong rush in Washington to use the current crisis to undermine the foundations of economic security even further?

Specifically, I'm talking about a new proposal to rob from Social Security to fund a continuing tax break for people who don't need Social Security — the wealthy.

Make no mistake: This is a bipartisan effort. It started back in December, when President Obama capitulated to the GOP on a budget deal by cutting the payroll tax, which funds Social Security. Advocates for the program pointed out then the shortcomings of this approach: It was targeted inefficiently and unfairly, skewing to the upper middle class and hurting lower-income families in comparison with the Making Work Pay tax credit it replaced.

Even more troubling, it blew a hole in the financing mechanism for Social Security by reducing payroll tax revenue by roughly $110 billion for the year. It was plain then, as it is now, that once you've cut a tax, it's ever harder to restore it.

Putting Social Security's income stream on the negotiating table for the first time in more than half a century simply provided a new opportunity for attacks on the program's stability from those who would love to see it disappear — to be replaced, no doubt, by a privatized investment program that would profit Wall Street hucksters at the expense of everyone else.

We were assured that the payroll tax cut negotiated in December would be a one-time, temporary step. No danger that Social Security could be permanently impaired, or so the assurances came.

It's now six months later. More economic stimulus is obviously needed, and the payroll tax is on the table again. (Surprise!)

This time the talk is of extending the one-time-only cut for workers, whose FICA deductions dropped to 4.2% from 6.2% of covered pay, and throwing in a similar break for employers, who also pay 6.2% of covered payroll. The talk comes against the backdrop of a signal from the big retirement lobby group AARP that it would accept certain changes in Social Security, including benefit cuts. (AARP backed off, but only a bit, when its policy shift was divulged publicly Friday.)

The theory behind the tax change is that it will encourage more employers to hire. That's not an idea out of left field; last year the bipartisan Congressional Budget Office scored it fairly high among policy options for improving employment, theorizing that from 2010 to 2015 it could produce between 40 cents and $1.20 in increased gross domestic product per dollar of tax reduction.

But the CBO didn't take into account the damage done to Social Security by making yet another component of its revenue stream conditional. Nor did the CBO comment, for obvious reasons, on how the idea underscores the paucity of political will in Washington to do anything sensible about the sputtering economy.

With growth in employment and consumer spending fading and current stimulus programs moving toward expiration, the need for additional government stimulus becomes clearer every day, just as Republicans in Congress dig in their heels even more firmly against new initiatives. The employer tax cut fails to address the fundamental drag on hiring, which is the lack of consumer demand. Among the options the CBO scored as high or higher than the employer payroll tax cut were several that would create unmistakable, direct spurs to demand.

These include extending unemployment payments, which are again nearing expiration; investing in infrastructure projects; and providing budgetary help to cash-strapped states to prevent public-employee layoffs.

Public employment has shrunk by about 600,000 jobs over the last couple of years; about 30,000 of those jobs were lost in May, contributing to the dismal jobs report the Department of Labor issued this month.

These options were all part of the last stimulus package, and contrary to GOP claims that it has "failed," the CBO found that it worked exactly as expected — increasing GDP as much as 3.1%, lowering the unemployment rate by up to 1.8 percentage points and providing work for up to 3.3 million people during the first quarter of this year alone. The CBO also noted that the economic impact of the program is waning.

Yet Washington remains stuck in do-nothing mode. Last week, two Republican congressional leaders, Sen. Lamar Alexander (R-Tenn.) and Rep. Jeb Hensarling (R-Texas), doused the idea of any new short-term stimulus.

"We don't need short-term gestures," Alexander said. "We need long-term strategies." He mentioned lower taxes and "fewer mandates" among the few options.

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