Strategy Behind Obama's Payroll Tax "Holiday"
By Robert Kuttner
Bipartisan Scheme To Transform Social Security From Earned Benefits To Welfare
The Republicans handed President Obama a nice tactical victory when they caved in just before Christmas and agreed to extend the payroll tax cut on Obama's terms (with no offsetting program cuts.) But the extension deal is only for two months, which means the battle will be fought all over again in February.
You could say this is double-stupidity on the Republicans' part, since the public will be treated yet again to a debate in which the Democrats want to tax millionaires in order to spare working people a tax hike, while Republicans defend the very rich and demand further cuts in valued programs as the price of avoiding a tax increase on ordinary Americans.
But maybe it's Democrats who have set themselves a trap. Some Social Security advocates contend that Obama's nice partisan victory is hollow if not Pyrrhic.
As you may recall, the worker share of the payroll tax was cut from 6.2 percent to 4.2 percent as a temporary economic stimulus measure. Under the present arrangement, the tax cut will be extended, but not at the expense of the Social Security trust funds, which will be made whole from transfers from general government revenues. So far, so good.
Here's the problem, say progressive critics of the deal.
First, it will never be a good time politically for either party to vote to raise Social Security taxes on working people, even once the economy is back in recovery. So the trust funds will be permanently reliant on subsidy from general government revenues. That, say critics, will make it seem less solvent, and less like an earned benefit, further softening Social Security up for privatization.
Second, if we are going to increase the deficit to stimulate the economy, tax cuts -- even on regressive payroll taxes -- are the weakest form of economic stimulus. Dollar for dollar, public investment is far more effective. So, even though the millionaire battle is a good one, Democrats are once again playing on Republican turf, where the issue is defined as who is the more reliable defender of tax cuts.
Let's take these arguments in turn. In fact, there is no good reason why Social Security has to be funded entirely by payroll taxes. No less than Franklin Roosevelt, in the program's original design, projected that as more and more workers became eligible, general government revenue would have to be part of its financing. And the payroll tax, capped at $107,000 of income and levied on the first dollar of earnings with no deductions or exemptions, is one of our most regressive taxes. Subsidizing Social Security with general revenue is good policy. As long as the system is substantially financed by payroll taxes, the benefit still feels earned.
The devil, of course, is in the details. Making up the Social Security gap with a tax on millionaires is a double win. It makes the tax system more progressive, and it starkly poses alternatives in a way that plays to progressive strengths.
The critics are right, however, that Democrats should be battling for public investments, not tax cuts. Still, when the issue arose of whether to extend the temporary tax relief on worker payroll taxes, there was no way Democrats could have supported what would feel like a tax increase in a jobs recession.
Going forward, how this issue plays out will depend substantially on President Obama. Will he continue to support taxing millionaires as a way of defending Social Security? Or will he revert to his stance during his Bowles-Simpson phase of putting Social Security cuts on the chopping block as part of a grand budget bargain?
That posture, in turn, will depend heavily on how much hell progressive Democrats keep raising whenever their president flirts with Social Security cuts. Shifting from an austerity posture to a stance of emphasizing jobs and defense of social insurance has turned out to be good politics for Obama. So, if nothing else, sheer expediency should push him in a progressive direction.
At the same time, Obama still has a worrisome tendency to position himself above partisan politics and to blame something called "Congress" for legislative blockage rather than blaming the source of the blockage, namely Republican obstruction and extremism. According to the deputy press secretary Joshua Earnest, quoted in the lead political story in Sunday's New York Times, Obama's election year strategy will be to attack "the image of a gridlocked, dysfunctional Congress and a president who is leaving no stone unturned to find solutions to the difficult financial challenges and economic challenges facing the country."
Say what? Who made Congress dysfunctional and gridlocked? Can't Obama savor a partisan victory in which he just helped Republicans marginalize themselves on a popular issue like payroll tax relief without reverting to a posture that accords his own party and the Republican opposition equal blame?
I think those in the progressive camp who worry about the impact of the payroll tax cut on Social Security are mostly addressing the wrong concern. On the other hand, continuing vigilance is needed on Social Security -- and we should never underestimate the capacity of this president to snatch defeat out of the jaws of victory.
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