The Payroll Tax: Just Another Tax?

4:55 am in Uncategorized by Eric Laursen

What does it mean that the U.S. no longer has a permanent tax code? That every major tax Americans pay, including income tax and the payroll tax covering Social Security, is now a temporary measure subject to — effectively — mandatory revision by Congress in the next one to two years? With passage of the Obama-McConnell “stimulus” package, American government is entering a fun-house period like no other in its history.

The tax cut/stimulus bill passed, of course. Indeed, the skids were really greased on this baby (to use then-Treasury Department official Bob Rubin’s choice phrase) like nothing since the 1983 Amendments to the Social Security Act. Here’s how the Wall Street Journal describes the situation we’re about to be living under:

Welcome to the world of the temporary tax code.

In the late 1990s, there were typically fewer than a dozen tax provisions that had just a limited lease on life and needed to be renewed every year or so.

Today there are 141.

Now Congress, taking up a deal worked out between the Obama administration and Republican leaders, is poised to turn the whole personal income-tax system into something of a temporary structure. The plan embraces a broad range of provisions—an extension of Bush-era rates, a new estate-tax formula—but for only two years. A payroll-tax cut in the bill is for a single year.

This means that if the compromise passes largely intact, the U.S. will have no permanent regime governing levies on salaries, capital gains and dividends, the Social Security tax, as well as a slew of targeted breaks for families, students and other groups. This on top of dozens of corporate-tax provisions that already were subject to annual renewal.

Word on the street in Washington is that the Obama-McConnell deal, which includes a one-year, partial payroll tax holiday – the first such interference with the revenue stream for Social Security in the program’s history – is just the first of a series of deals between the White House and the Republican leadership. The next step will be a deal to be concluded as part of negotiations to raise the debt ceiling – a necessary act of Congress if the federal government is to keep funding its activities past this coming spring.

As described by Robert Kuttner in Politico.com, the deal will be for the president to propose adopting much of the agenda the co-chairs of his deficit commission paid out, including cutting Social Security. doubtless, this will raise a torrent of opposition. Roger Hickey of Campaign for America’s Future is calling for working Americans to flood the White House with faxes, emails, and phone calls demanding that he stop this exercise in self-immolation and refuse to be blackmailed over the debt ceiling increase.

The problem is the situation set up by the Obama-McConnell deal. To put this in perspective a bit, payroll taxes have always been a thing removed from the rest of the tax code. Changes in payroll tax rates have never been negotiated in tandem with any other federal tax, because they’re dedicated to one purpose only: funding Social Security.

Today, we’re being told that payroll taxes should be reduced. This despite the fact that the program is expected to face a shortfall at some point in the future, and for a reason that has nothing to do with Social Security itself: economic stimulus. Of course, getting the economy moving again is a worthy goal, and Obama is replacing the lost funds out of general revenues. But the point is that this is a breach of faith with the millions of people who pay payroll tax with the understanding that it will be used to insure them against poverty in old age, as survivors, or in account of a disability.

Thanks to this exercise in bipartisanship, there will no longer be anything sacrosanct or special about payroll taxes. They will be merely one more set of chips in the now endless poker game over how to manipulate the U.S. tax system. This year, and next year, and every year after that. The Republican leadership has made clear that the only way to end this state of flux is to permanently extend the Bush tax cuts, abolish the estate tax, and begin phasing out Social Security and Medicare.

That’s not going to happen right away. But the way is being prepared. Because the inevitable result of putting payroll taxes in play is that Social Security itself will stop being regarded as singular either. It will be just another government program, not a social insurance system built on collective trust and participation.

Perhaps this shouldn’t be surprising coming from Obama. Historically, he can be seen as the third of America’s post-New Deal American Democratic presidents. The first was Jimmy Carter, who once surprised one of the program’s godfathers, Wilbur Cohen, by saying, “But Social Security is not sacrosanct.”

Carter had to scuttle an attempt to cut the program that his HHS secretary cooked up; Bill Clinton came close to making a deal with Newt Gingrich. Both had to be persuaded not to go down that path by a vigorous grassroots campaign against such a move. An even stronger effort is going to be necessary this time, because the payroll tax has already been compromised, and because the discussion is no longer a relatively simple one about Social Security. It’s about the entire U.S. tax code.

In this fun-house discourse, the inevitable question is, If we can reform the tax system be reducing income tax rates and eliminating tax loopholes, why can’t we “reform” payroll taxes as well? The slippery slope leads from there.