12/25/2011 03:21 pm ET Updated Feb 24, 2012

Media Fail to Tell Full "Tax Holiday" Story

Democratic leaders and the White House are congratulating themselves as they depart for the holiday weekend about their tax-holiday victory -- but only until the Feb. 29 leap-of-faith day -- over GOP hardliners. But the payroll tax holiday, like most vacations, will have its bill to pay.

The national media have been playing the bipartisan shuffle in terms of Democratic stimulus versus GOP stinginess. But such major media as the New York Times, Wall Street Journal have largely abrogated their responsibility to report another viewpoint that multiple progressive experts and commentators have argued for since the essentially Republic tax-cut idea was put forward and accepted last year by the Obama White House.

A long list of prominent policy experts and advocates have contended for over a year that although the economy likely needs the tax cut's modest economic transfusion, President Obama could have accomplished the same thing even more effectively -- and without breaching the firewall between the Social Security Trust Fund and general U.S. tax dollars -- by fighting for his own Making Work Pay program.

Although Making Work Pay wasn't as politically catchy as Payroll Tax Holiday -- it was an effective tax credit of up to $400 passed as part of Obama's 2008 stimulus measure. It lasted two years and lapsed with Obama's judgment on this issue.

Not Much of a "Middle-Class" Tax Break

With Making Work Pay, the government could have set the tax credit at, say $800 for the year, about the "average" amount saved under the payroll tax. With the payroll tax cut, the Über Percent pay the FICA payroll tax on their earnings up to about $110,000. But if everyone had been limited to $800 or so, then much more of the $112 billion payroll tax cut from 2011 would have gone to people who could really use it and would get into the economy.

In other words, by giving everyone a 2 percent cut, Washington has gifted more money to wealthier people, those apt to salt the savings away in their banks, and less to middle and working class people, who would be more likely to spend it on rent, groceries and maybe a few holiday gifts.

In fact, the number crunchers at Sentier Research released their analysis this week casting doubt on whether the tax holiday is really a "middle-class tax cut" at all.

Sentier showed that compared to how much people at different income levels would have received under the Making Work Pay tax credit, under the payroll tax reduction, "The largest tax savings went to households in the highest income" brackets. The bottom 30 percent of Americans actually lost money.

What's more, "Households in the middle-income deciles gained very little, casting doubt on the often-heard assertion that this was a 'middle-class tax cut,'" says Sentier Research.
Even without the tax-credit comparison, says Sentier, the tax savings that went to the nation's richest 10 percent in 2011 was $2,990, quadruple the savings for workers in the middle -- and 25 times higher than the mere $122 amount -- about $10 a month -- saved by the bottom 10 percent.

That total bill the federal government needs to pay the Social Security Trust Fund back ($112 billion in 2011) won't much affect the long-term solvency of Social Security -- unless the holiday becomes permanent. And therein lies the national rub, which mainstream media seems to have shrugged off as hardly worth a mention in most news reports.

The Nation's Retirement Nest Egg

Now, don't get me wrong: The billions from the payroll tax holiday, now that we're stuck with this vehicle, should be renewed for now. But it was a dangerous way to go. Republicans originally proposed this approach years ago knowing it would break the barrier between the nation's retirement nest egg and general U.S. tax revenue. That barrier guards against short-term pressures, just as private pensions are separate from family cash flow, or from corporate budgets with penalties for withdrawal except in certain cases.

Here's why that division between the nation's pension plan and annual political wrangling over our tax dollars is so important. President Franklin D. Roosevelt had Social Security designed to stand independently from any other part of the federal budget. Liberal factions of the 1930s actually opposed his approach because they thought Congress should cover the program's costs annually through general taxes, as other countries did at the time. Liberals thought doing so would remind Congress of its duty to the public welfare annually. Yeah, that was going to work really well.

FDR tied Social Security to workers' wages, with an equal contribution from their employers, so everyone would feel it was his or her money. Conservatives contend that the payroll tax contributions are not really yours, but the refrain heard in today's town hall meetings and echoed in national polls has been, "It's our money. Keep your hands off of it." And truth be told, the program has been paying retirees (and later family survivors and those who become disabled) steadily for most of its 76 years of operation).

Now, though, the government needs to pay back the payroll tax cut -- through general taxes. A temporary boost to the working stiff in tough times? As predicted by media-ignored national experts and economists on the left, GOP leaders have been saying since its passage last year that they plan to attack any future Democratic effort to restore the 2 percentage point reduction by screaming bloody murder that Democrats want to raise your taxes. As seen this week, of course, the donkeys are grinning over extending it themselves.

The unreported concern is that once the prophylactic wall between Social Security and overall taxpayer dollars is punched, although just a little, it will be like a puncturing a vacuum-packed can. Longstanding conservative arguments that Social Security really isn't in a family and retirement lockbox, but is only sealed from other federal spending by worthless promises, could become a self-fulfilling prophesy.