Fixing the Payroll Tax
One of the items of unfinished business remaining before this session is extending the payroll tax cut of last year that funds Social Security.
It’s an infra-marginal tax cut, meaning that it doesn’t change economic incentives and therefore it doesn’t produce lasting economic growth. But it does provide great relief to working families, allowing them to keep more of their earnings at a time of declining incomes, shriveling assets and rising prices, and it should be extended.
But it must be extended responsibly to avoid doing further damage either to the economy or to the Social Security system.
That means we have to make up the lost revenue.
The Democrats have said, “No problem, tax the rich.” They say that a lot. The problem is that the tax increases they propose are marginal tax increases – precisely the kind of tax increase that does enormous damage to the overall economy. Remember, more than half of net small business income would be subject to their latest proposal – at precisely the moment when we’re depending on those same small businesses to create 2/3 of the new jobs that our people desperately need.
The measure that passed out of this House this week also does far more harm than good.
The House added $167 billion more to this year’s already crushing deficit, mostly to pay for the payroll tax cut, purporting to repay one year’s tax relief over the next ten years.
How does it do that? In part, it tacks on additional fees to mortgages backed by Fannie Mae and Freddie Mac.
This shifts the burden to home buyers, who will end up paying far more in new taxes (that will now be hidden in their mortgages) than they will get back from the tax cut.
True, under the House version, the average family will save $1,000 in payroll taxes, but if that family takes out a $150,000 mortgage in the next ten years backed by Fannie or Freddie, they’ll end up paying an extra $3,000 as a result of the House bill. That’s a $1,000 tax cut this year for $3,000 in additional mortgage payments.
The House version kicks the housing market when it’s already down, making it that much more expensive for home buyers to re-enter that market, and adding to the pressures that have chronically depressed home values.
At the same time, the House would turn Fannie and Freddie into tax collectors for the general fund. If this version is enacted, we will have constructed a cash machine for government with an adjustable knob. Given the insatiable appetite of this government, the odds are far greater that that knob will be turned up and not down in coming years.
Ironically, one of the reasons to continue the payroll tax cut is because of shrinking family assets – mainly the value of their homes. The House version adds to the downward pressure on their home values while telling them we’re doing them a favor. Some favor.
Fortunately, there is a way to extend the payroll tax cut, protect the Social Security system AND avoid doing further damage to the economy, and that is the measure offered by Mr. Landry of Louisiana, H.R. 3551. That bill was given short shrift in the House last week, and that’s a shame.
Mr. Landry’s bill would give all Americans the choice to receive the year of tax relief in exchange for delaying their retirement by a month. According to the Social Security Chief Actuary, this would pay for itself.
It would give every family in America the choice of deciding for itself whether the benefits of the tax cut are worth the cost of working a month longer. It would have provided tax relief for those families that need it without doing harm to the Social Security system that the tax supports --- without shifting the burden to pay for it to homebuyers, as the House version does, or to job creators as the Senate plan would have done.
It is not too late to fix this problem the right way, and I would strongly urge the House to take this measure more seriously in the closing days of this session.
House Chamber, remarks by Congressman Tom McClintock. Washington, D.C. December 15, 2011.