We Can’t Afford the Payroll Tax Cut Extension

Americans should be used to the high political drama coming out of Washington.  Oh, there are the stories of marital infidelities, disappearing Congressional aids, toe-tapping senators and the like.  Then there are the great debates where both sides of an issue scrap and claw their way to political pay dirt.  Healthcare reform and the recent battles on raising the debt ceiling come to mind.  Funny how things always come together at the 11^th hour?

Currently on the docket is the payroll tax cut extension. Passed in 2011, the payroll tax cut reduced a taxpayer’s contribution toward Social Security from 6.2 percent to 4.2 percent.  The goal of the legislation was to put more money in taxpayers’ hands in order to stimulate the economy.  The measure expires on December 31, 2011.

Now, the drama comes in because the Democratic controlled Senate approved a two month extension to the measure while the Republican controlled House rejected the Senate plan in favor of a one year extension.  Democrats are bent on their bill and Republicans on theirs with time quickly running out.  If an extension is not approved by December 31, 148 million Americans will see their taxes go up – at least that is the story coming out of the White House.

In the first place the name of the measure is a bit of a misnomer intended I am sure to confuse many taxpayers.  The payroll tax cut is not a cut to a worker’s income tax amount.  It is a reduction in the amount that workers pay into the so-called Social Security Trust Fund.  In other words, it is akin to paying less on a retirement annuity each month but still maintain eligibility for full retirement benefits under the original policy.  An annuity holder would never expect this allowance.  For the life of me, I can’t understand how the average taxpayer would – unless they have been confused.

Secondly, the propaganda pundits on the MSM are claiming that if the tax cut is not extended it will potentially push the U.S. economy into a recession.  Of course, that is the knee-jerk reaction of all Keynesians when it comes to government intervention in the economy.  They believe in the more the better with no regard for tomorrow since “in the long run we are all dead”.

And essentially this tax cut extension is a Keynesian spending program because the tax pays for an entitlement that has to be paid to retirees.  With a drop in tax revenues the government will have to print money in order to meet Social Security obligations.  Those obligations simply aren’t going away and have to be met.

The problem with more spending is that it doesn’t work to stimulate the economy out of recession.  Since January 2009 the federal government has spent $4.5 trillion. Unemployment is higher, food stamp rolls are at an all-time high, and many Americans are still losing their homes.  When is enough enough?

Lastly, how smart is it to cut funding for a program that is already bankrupt?  The Social Security Trust Fund already pays out more than it receives in tax revenues.  Future unfunded obligations for both Social Security and Medicare are over $50 trillion.  Given the program is not going to end anytime soon, putting it in even worse fiscal condition borders on the criminal.

The payroll tax cut is nothing more than another something for nothing proposition.  It has not helped the economy so far and an extension would further devastate the fragile balance sheet of Social Security and Medicare.  Once again Washington is offering the world – more free money, Social Security intact, no spending cuts, and a blind eye to trouble down the road.  It is amazing that Congress and the President can’t find a measly $100 billion to cut from the enormously bloated federal budget to pay for the plan.  With leadership like that in Washington it will be a miracle if the economy doesn’t eventually fall over a cliff.  But have no fear, I am sure Congress and the President will get together at the 11^th hour to produce the tax cut extension.

Article first published as We Can’t Afford the Payroll Tax Cut Extension on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

Politicians Just Can’t Admit Failure

It’s a funny thing, but politicians more than any other group seem to have an incredibly hard time admitting failure when it comes to programs and policies they support.  Take congressional housing kingpin Representative Barney Frank for example.  A devout proponent of Fannie Mae and Freddie Mac, Frank never saw the collapse of the two Government Sponsored Entities coming.  In fact, he made proclamations on at least one occasion before Congress that, “Fannie and Freddie are not in crisis”.  Of course, both were in a crisis ultimately requiring a huge taxpayer bailout.

Then there were Fed Chief Ben Bernanke’s constant denials that a housing bubble wasn’t forming and the economic joyride produced by his and his predecessor’s easy money policies was going to last forever.  The housing bubble was so bad that almost 3 years after it popped home values are still falling.

Now, add Nevada Senator Harry Reid to the list of failure denying politicians.  His cause – the third rail, the fourth estate, the system bearing the name that makes all statists smile.  Of course, I speak of Social Security.  Last Sunday on Meet the Press, the following exchange took place between host David Gregory and Reid:

SEN. REID:  One of the things that always troubles me is, when we start talking about the debt, the first thing people do is run to Social Security. Social Security is a program that works, and it’s going to be–it’s fully funded for the next 40 years.  Stop picking on Social Security.  There are a lot places we can go to…

MR. GREGORY:  Senator, you’re really saying the arithmetic on Social Security works?

SEN. REID:  I’m saying the arithmetic on Social Security works.  I have no doubt it does.

MR. GREGORY:  It’s not in crisis?

SEN. REID:  No, it’s not in crisis.  This is, this is, this is something that’s perpetuated by people who don’t like government.  Social Security is fine.  Are there things we can do to improve Social Security?  Of course.

Even the lover of state power host David Gregory couldn’t believe the temerity of Reid’s comments about Social Security.

So, why was Reid’s description of Social Security so inaccurate?  Well, according to the Congressional Budget Office (CBO), benefit outlays under current law will begin to exceed tax revenues on a regular basis starting in 2016.  Additionally, the CBO projects that the disability benefits portion of the “trust fund” will run out of funds in fiscal year 2018 and the old age retirement “trust fund” will be exhausted in 2042.  The CBO’s projections take into account baby boomer mass retirement and dispute Reid’s claim that Social Security is “fully funded for the next 40 years”.  And this doesn’t even take into account the fact that the Social Security “Trust Fund” currently has IOUs totally about $2.5 trillion because spendthrift politicians have raided it over the years to fund the rest of the warfare/welfare state.

The truth is Social Security faces insolvency because it is a Ponzi Scheme.  In fact, it’s a larger Ponzi Scheme than Bernie Madoff’s.  His was estimated to be in the hundreds of billions, Social Security’s is in the trillions.  You see Social Security is unlike other have paid retirement programs in that you don’t technically own your contributions to the fund and the fund is not invested in anything tangible.  As a matter of fact, the Supreme Court ruled in Flemming v. Nestor 1960 that the federal government is not even contractually obligated to pay you benefits even though you may paid into the program all your life.  Some deal, uh?  Yet Harry Reid maintains that it is I am sure because he doesn’t pay into it.

We are all aware of the devastation caused by the policies and programs supported by the likes of Barney Frank and Ben Bernanke.  Fannie and Freddie collapsed and the housing market popped in spite of the positive sentiments expressed by the dynamic duo.  Certainly, other examples can be found where politicians refused to admit failure and danger could have been avoided.  Hopefully, some other leader in Washington will have more sense than Harry Reid and work to do something to prevent the coming Social Security crisis.

It is Always Something for Nothing in Washington

Our political leaders in Washington are the biggest bunch of cowards.  At every opportunity they weasel out of making any tough decisions.  Now, you might be thinking that everybody knows that running away from hard choices is what politicians are especially good at, but ours have made it an art form.

Take the whole debate over extending the Bush-era tax cuts for instance.  It has turned into a complete joke.  In the first place, renewing current tax rates is not a new reduction in taxes for anybody.  Only in Washington, is extending tax rates at current levels considered a tax cut.

Then we have Larry Summers, Obama’s chief economic advisor, coming out warning that if the tax cuts don’t go through we will have a double-dip recession.  Then why didn’t the Administration extend tax rates a long time ago?  They had the entire federal government under their control and could have done it.

Other Washington economists are making outrageous claims that the compromise package between the President and congressional Republicans will actually produce millions of jobs and add 1 percent onto our yearly GDP.  This could be believed if Washington was actually cutting income tax rates.  But, it’s not.  The bill would actually cut employees’ portion of the Social Security tax from 6.2 percent to 4.2 percent.  But, to finance the rate cut Uncle Scam will borrow over $100 billion.  This borrowing will be inflationary and will limit the supply of capital available for American business to expand and begin hiring workers again.  Thus, any positive effects of the rate cut will be negated by the consequences of government borrowing.

Make no mistake about it, this whole debate on extending the Bush-era tax rates is the epitome of what is wrong with the federal government.  It’s all about making easy choices and stretching the truth about how those choices are great for the country.  In essence, it boils down to another something for nothing failed economic policy.

Look, the Bush-era tax rates should have been renewed a long time ago.  This would have eliminated any uncertainty facing business and allowed them to plan long term and perhaps hire workers.  Instead, Congress and the President have waited due to political expediency until the 11^th hour to act.

The vote should also have been a straight up or down vote with no other measures like extending unemployment benefits and cutting Social Security rates attached.  The political games that are played by attaching multiple measures to bills serve no good purpose.  It only increases the budget deficit and provides the allusion that Washington can provide everything to all people without costs.

And that is exactly what this entire package is: something for everyone with no worries about the costs.  Republicans get tax rate retention for all.  They also get a reduction in the Social Security tax rate.  Democrats get an extension of unemployment benefits for another 13 months to folks who have already been collecting for close to two years.  Of course, both sides will also get dozens of earmarks just to sweeten the pot.  How any of this will be paid for has naturally not been discussed.  And don’t look for the mainstream media to bring up that question.  The report of the President’s debt commission is not even dry and Congress is contemplating spending an additional $800 billion.  One commentator had it right when they labeled the compromise package nothing more than a backdoor stimulus package.  Given how unsuccessful the trillions in stimulus money we have already spent has been don’t look for this one to produce new jobs or economic growth either.

In terms of the additional measures attached to the tax rate retention bill, namely the cut in Social Security tax rates and extension of unemployment benefits, one should be done with corresponding cuts in spending while the other shouldn’t be done on the grounds it will do more harm than good to the prospects of the unemployed finding a job.  To cut funding for a program that faces tens of trillions of dollars in future unfunded obligations is incredibly irresponsible.  What’s even more irresponsible is to cut funding and not make any alterations to outlays.  Given that average life expectancy has risen by ten years since the inception of Social Security Congress could reasonably raise the retirement age for recipients to at least 70 from 65.  I mean Americans are going to have to give up some things in order for our financial ruin to be avoided.  If Congress and the President don’t even have that little bit of courage then we are far worse off than can be imagined.

Perhaps the Republicans and Democrats are fearful that any interruption of federal largess to any one group of Americans could produce riots that have been seen in Greece and more recently in Great Britain.  Perhaps they are fearful of doing something to jeopardize their own reelections.  Whatever the reason, it doesn’t matter.  The bipartisan bill to extend the Bush-era tax rates is hardly a compromise.  Neither side had to really give up anything.  It is the epitome of how the federal government works and why our nation is bankrupt – you can always get something for nothing in Washington.