The White House is considering adopting a temporary Social Security tax cut on employers to stimulate the economy as part of the debt ceiling negotiations with the Republicans, according to a Bloomberg News article. If the Administration so much as puts another Social Security tax cut on the table, they will be throwing Social Security under the bus for uncertain -- indeed, unlikely -- economic gain.
It seems like déjà vu. Wasn't it just last year that progressives had to talk themselves blue in the face explaining the harm that a temporary payroll tax cut would do?
In case you hadn't heard, the Obama Administration already enacted a one-year 2 percent payroll tax cut on the employee side as part of the tax cut deal with Republicans in December 2010. The revenue that Social Security would have gotten from the missing 2 percent of taxable payroll is being replaced by a one-time transfer of $105.2 billion from the general fund. (Click here for more on how Social Security is funded.)
At the time, the payroll tax cut was criticized by progressives for endangering Social Security's finances and undermining the program's political underpinnings. A critique made by Nancy J. Altman, a nationally renowned Social Security expert and co-chair of the Strengthen Social Security Campaign, still offers the best explanation for why a payroll tax cut is disastrous. Her arguments remain just as true of a payroll tax cut for employers. Here it is in a nutshell (though Nancy's full critique is a must-read):
Gradually defunds Social Security. The payroll tax cut will almost undoubtedly outlast its one-year expiration date. As the debate over the Bush tax cuts illustrates, taxes are easy to cut, but hard to restore, whatever the expectations are when enacted. Maintaining the reduced payroll tax rate would require the general fund to continue to transfer a growing amount of revenue to the Social Security Trust Fund amid mounting pressure to cut spending from the general budget. Social Security would have to compete with all other domestic spending programs for its share of a rapidly diminishing pie. The result would be both a real financial crisis for Social Security, and a crisis of public confidence in the program's integrity.
Undermines the program. The payroll tax is fundamental to the American public's commitment to Social Security. It is less a tax than a dedicated down payment for an earned insurance benefit. The payroll tax represents a tangible feature of the promise that if workers pay into Social Security from their wages, they earn its benefits when they retire, become disabled, or experience the passing of a loved one. That is one reason why, at a time when anti-government skepticism is at an all-time-high, even Republicans and Tea Partiers strongly support Social Security and oppose benefit cuts. Diminishing the payroll tax risks undermining that robust commitment.
Is a poor source of stimulus. The payroll tax cut is far more expensive, less progressive and less stimulating for the economy than other stimulus options like renewing the Obama Administration's middle class Making Work Pay tax cut. (Click here for an analysis and chart comparing the two tax cuts.)
The damage of one payroll tax cut has already been incalculable. Expanding it to include employers -- in effect extending it -- will be even worse. Deficit hawks falsely claim that Social Security contributes to the deficit. Putting it on the hook to the general budget, even temporarily, gives truth to their charge. A one-year payroll tax cut for employees was one thing -- but two years running? At what point will the general fund turn off the spigot, turning Social Security's modest shortfall into an immediate financial crisis?
Precious political energy has, and will continue to be spent, preventing the current payroll tax cut from being extended. Republicans will no doubt depict it as a major tax increase, and exploit it for political gain as the 2012 election approaches. Doubling our efforts to include fighting the extension of an employer payroll tax cut, which will likely elicit the lobbying prowess of big business, is a bridge too far. It will suck major resources from the left, and aggravate the Democratic Party's base in the run-up to the 2012 election.
Perhaps most importantly, unlike the current payroll tax cut -- which was inefficient stimulus, but stimulus nonetheless -- an employer-side tax cut will do little, if anything for the economy. Employers are not the ones who are hurting; consumers and workers are. Corporations earned $1.68 trillion in profits at the end of 2010 -- and were sitting on over $1 trillion in cash. Hiring has yet to pick up because consumer demand remains extraordinarily low. Giving businesses more money to work with is not going to change that.
The position that the Obama Administration is in right now is not enviable. With a weak jobs report last month showing that the recovery is faltering, they know they need to do something. But Republicans are adamantly opposed to any policies to get the economy going other than high-end tax cuts.
If, as Jared Bernstein speculated on Charlie Rose recently, the White House is eying an employer payroll tax cut, because it is the only thing Republicans will accept to raise the debt ceiling, then the President should stop wasting his time with the GOP. The Republicans clearly want to have their cake and eat it too -- that is, destroy entitlements and reap the political gains to be had from a failing economy. They must be hoping to achieve parts of their extreme ideological goals under a Democratic President, and retake the White House in the following year to finish the job.
Instead, the President should take his case to the American people. The public may not like raising the debt ceiling in theory, but they certainly do not favor throwing Social Security under the bus for a budget problem it did not cause.