Wednesday, December 21, 2011

Putrid Payroll Tax Politics

The President and Congressional Democrats are doing an incredible job of making a mountain out of a mole hill in the debate surrounding the most recent payroll tax “cut” debate. 

The White House spin machine is at max capacity, resorting to flooding Twitter with the question of what $40 per paycheck means to everyone (i.e. the $40 extra a working family making $50,000 will see in their paycheck every other week if the tax “cut” is passed).  The sob stories came flooding in showing that it would pay for bowling with an autistic godson or co-pays on diabetes prescriptions.  Remember, the Administration is only using this rhetoric to push for a 60 day extension to a temporary tax "cut", not fundamental tax reform or any other policy of substance. 
It's a shameful political game and an incredible illustration of the desperate pandering to the electorate by the current White House.
We won’t recount the reasons why a temporary tax holiday is ineffective - John Taylor does a better job than we ever could in today’s Wall Street Journal.  It won't suprise anyone that temporary tax cuts or rebates only serve to inflate the deficit while providing little to no substantive or sustained economic benefit.  The one-time tax rebate of 2001, the temporary tax cut of 2008, the cash-for-clunkers and stimulus payments of 2009 are Exhibits A, B, C and D, respectively. 
While the debate rages on about whether there will be an extra $40 in the average family’s first 2012 paycheck, the silence has been deafening on the effects of this “cut” on future generations. 
Politicians will tell you that the “cuts” are paid for by this spending cut that will happen in 2019, or that spending cut that will happen in 2021.  These cuts will never materialize, and everyone knows it.  It’s a farce, yet it still passes for a legit way to “score” the bill as deficit “neutral.” 
We’d like to once again remind everyone what the payroll tax is meant to pay for – future Social Security and Medicare benefits.  Given the Madoffian nature of our Social Security and Medicare programs, the payroll taxes of today’s working families are used to pay the benefits promised to yesterday’s working families, regardless of how much they contributed.  Therefore, the less we put into the system today, the more we’re going to have to take from taxpayers in the future. 
Let’s assume the payroll tax gets extended another year (despite all the political grandstanding, does anyone think Congress has the intestinal fortitude to actually keep the tax cut temporary?). 
Each family now has an average of $2,000 more in their pocket instead of in their Social Security or Medicare trust fund.  Yea!  We can buy that 60” flat screen we’ve always wanted!! 
However, if you think about the long term ramifications of this tax “cut”, you might think twice about that TV. 
A $4,000 cut today (i.e. two years at $2,000 each) has a future value (using a conservative 5% growth rate) of roughly $10,000 in 20 years, $17,000 in 30 years, $28,000 in 40 years or $46,000 in 50 years time.    
Let’s make a giant leap of faith and assume that these programs are not the largest Ponzi schemes on the planet, and are run by competent actuaries who agree 6.5% is the appropriate amount of taxes required to fund future benefits.  If we reduce that 6.5% to 4.5% without reducing future benefits, it’s going to cause a shortfall in the funds available to pay those future benefits.  After a two year payroll tax holiday, the average 27-year-old working family will have paid $4,000 less into the Social Security and Medicare trust fund.  When the family retires in 40 years, that $4,000 holiday results in a $28,000 hole in the pot of money available to fund their future Social Security and Medicare benefits.
Since Social Security and Medicare are defined benefit plans, that $28,000 will need to come from somewhere. 
Our children and grandchildren.
Future generations will pay for our temporary tax holiday in the form of higher taxes. 
It’s bad enough to get stuck with a dinner bill when you go out to eat with your parents or grandparents.  How would you feel getting stuck with a $28,000 bill because your parents demanded an extra $40 in each paycheck for two years? 
Could you imagine placing that burden on your children and grandchildren?  What will you say when your children and grandchildren ask you why the $40 was so important back in 2012? 
It’s shameful.

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