Words of Warning on the Payroll Tax

The media ponders the wisdom behind the tax holiday's extension

Last week, Congress voted to extend the payroll tax holiday through the end of 2012. Social Security supporters have argued that a tax holiday may not be such a hot idea, and could jeopardize the program’s future by changing its revenue stream and eventually making it compete with other programs for general revenues. Alarm bells rang at the end of 2010 when the Obama administration managed to cajole Congress into cutting the payroll tax for one year in order to channel a few more dollars into workers’ pocketbooks. When advocate Nancy Altman argued in an interview with NPR that once tax cuts are in place, they are hard to repeal, she sounded like Moses in the wilderness. The press was busy portraying the tax cut as a welcome Christmas gift from the president.

The tax holiday expired in December, and Congress agreed to a two-month extension, which will now last until the end of the year. This time, the press expanded its coverage and reported that politicians of all stripes wondered if such a move was wise. The NewsHour’s Judy Woodruff asked House Minority Leader Nancy Pelosi if she was worried that the money taken from Social Security by reduced payroll contributions might never be fully repaid. “No, I don’t worry about that,” she replied. “I think that this should be the last year for it. One or two years, no, the trust fund can handle that.”

Other outlets reported that not all Democrats were on board with the extension. On the Senate floor, Iowa Democrat Tom Harkin was blunt:

I never thought I would live to see the day when a Democratic president and a Democratic vice president would agree to put Social Security in this kind of jeopardy. Never did I imagine a Democratic president beginning the unraveling of Social Security.

Later Harkin said: “It’s the devil’s deal. It’s a bad deal.”

Opposition also came from the other side of the aisle. Jeff Fortenberry, a Republican congressman from Nebraska, voiced similar concerns. Said Fortenberry: “They are framing it as a middle-class tax cut even though this is a significant change to how Social Security has traditionally been treated. The payroll tax keeps Americans attentive to the fact that they put a little bit aside each check for Social Security. That connection is now gone.”

It isn’t gone yet, but commentators on both sides are raising the possibility that the tax holiday may eventually break the historical link between payroll tax contributions and workers’ rights to a benefit in old age. They are, in effect, asking whether the payroll tax holiday is actually a middle class class tax cut, as claimed by the Dems, or the destruction of workers’ retirement security, as suggested by the GOP.

Jeffrey Brown, who served as a senior economist for President George W. Bush’s Council of Economic Advisors and who traveled with the Bush White House campaign when it was promoting Social Security privatization in 2005, wondered on the Forbes site if “maybe President Obama really is the Damn Politician that FDR was worried about.” Brown was referring to FDR’s famous comment from 1941: “We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my Social Security program.”

Brown argued that Obama’s “budget gimmick” of shifting money from general revenue to pay for the lost payroll tax income makes it seem like the trust funds are “unaffected by this tax cut.” In the long run, he said, “this has the potential to erode political support for the program,” which “starts to look more like a welfare program than a contributory social insurance program.”

Los Angeles Times columnist Michael Hiltzik sent similar signals Sunday, warning that Obama’s tax deal spells trouble ahead. He reports that some conservatives and liberals say it will be hard to restore the old payroll tax rate in the foreseeable future. Restoring the tax in a single swipe would mean a sudden tax increase of almost fifty percent, which pols could paint as a tax hike on the middle class, he says. Increasing the rate to its former levels might get tangled in a deal to extend the Bush-era tax cuts for the rich, or give supporters of privatization their opening by channeling a portion of the tax increase to privatized accounts—something they have championed for years and that would, some experts say, undermine the program.

It’s topsy-turvy politics, alright. Dems portraying themselves as angels delivering middle class tax cuts; Republicans casting themselves as saviors of social insurance. Election politics swirling around Social Security could get really interesting, as this recent press coverage suggests. Eric Kingson, co-director of the advocacy group Social Security Works, told Hiltzik: “You’re risking long-term economic security for a short term economic gain, however important that is. We hope people understand that.” They might if there’s more reporting like we saw last week.

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Trudy Lieberman is a longtime contributing editor to the Columbia Journalism Review. She is the lead writer for The Second Opinion, CJR's healthcare desk, which is part of our United States Project on the coverage of politics and policy. She also blogs for Health News Review. Follow her on Twitter @Trudy_Lieberman. Tags: , , , ,