There is no better example of the delusion and dysfunction that exists in Washington, DC than the political theatre surrounding the proposed extension of the payroll tax holiday.
The payroll tax holiday was ill-conceived from the beginning. It was added to the Bush tax cut extension late last year to allow President Obama and the Democrats to presumably show that they got something in the deal. It came at a cost of $120 billion. It also came at a time that the Social Security Trust Fund was running a cash flow deficit for the first time in its history. Social Security taxes are projected to be $46 billion short of expenditures for the year after a $49 billion deficit in 2010.
2011 also marks the first year that an ever increasing wave of baby boomers are turning age 65. Each successive year will see more boomers turn age 65 and put more pressure on Social Security. The Congressional Budget Office projects that about 97 million people will be (hope to be?) collecting Social Security benefits in 2035. 56 million people are collecting benefits today. That is a 73% increase in the number of recipients not to mention the cost of increasing benefit payments.
You have to be delusional to take $120 billion of revenue away from a program that is already heading towards financial stress. However, President Obama was not content with these small potatoes. For his proposed Jobs Bill of 2011 he wanted to double down on the payroll tax holiday for 2012 at a cost of $240 billion. His proposal was to extend and increase the amount of the tax holiday and also to expand it to employers for the first $5 million in wages paid. This would have meant that almost 40% of Social Security payments in 2012 would have been unsupported by current revenues.
How was this going to be paid for? The Democrats proposed a tax on millionaires that would take 10 years to raise the money given away in a one year payroll tax holiday extension. This is the kind of math that is typical of the dysfunction in D.C. Spend it one year and pay for it over 10 years. At the same time, undermining the entire Social Security system by attempting to change it into another redistribution scheme rather than the contributory retirement system it is supposed to be. Of course, all politicians in D.C. are claiming that their highest priority is protecting Social Security. This is the delusion and dysfunction of D.C. at its highest.
House Republicans refused to go along and passed their own version of the payroll extension for 2012 last week without expanding it. This lowered the cost to $120 billion-the same as last year. It would be paid for by freezing federal employee pay through 12/31/13, increase federal employees' contribution to their retirement and increasing the amount that high income beneficiaries have to pay for their Medicare Part B and D premiums.
The Senate responded on Friday by passing the payroll tax extension for just 2 months. In effect, they have kicked the can down the road once again. They have taken an uncertain 2012 and made it even more uncertain. Is it really a 2-month extension and its over? Or do they just want to get home for Christmas and they will deal with it again in February? Dysfunctional is the only way to describe these actions.
There is absolutely no way that the payroll tax holiday should have been enacted to begin with considering the financial condition of Social Security. To extend it is insanity.
However, this is the way politics is played and no one wants to step up and say NO! Democrats want to look like they can be for tax cuts. Of course, a large part of their constituency is not paying any income taxes so what can they do? They can only seek more refundable income tax credits or look to the payroll tax. The Republicans have fought hard to draw the line on any more redistribution tax schemes that soak the rich so they are not in a good position to argue against extending an across the board tax cut.
We are where we are because no one wants to take the political fire for "raising" the payroll tax that should not have been reduced to begin with. This is another one where President Obama deserves the blame. He is supposed to be a leader. He is supposed to be the adult in the room. By proposing an extension of the payroll tax he showed he is interested in only playing politics. We do not have a chance to move beyond the delusion and dysfunction in D.C. until he leaves office.
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