One of the key components of the tax deal that President Obama reached with Congressional Republicans is a two percentage point reduction in the Social Security payroll tax on employees, from 6.2 percent to 4.2 percent. That payroll tax “holiday” is scheduled to last only one year, and the government would credit the Social Security trust fund sufficiently to make up for all of the lost revenue. Because the provision would provide desperately needed economic stimulus and extra cash to struggling workers, at first blush it seems like one of the best elements of the agreement.
But there’s reason to worry that it might not be such a great idea after all. As the current debate in Washington demonstrates, the expiration of previously enacted tax cuts easily becomes re-cast by conservative and centrist politicians as a tax increase. Republicans have been able to sustain all of the temporary tax cuts that would otherwise cease by year-end, including those for the very wealthiest Americans, through their lock-step opposition to tax increases of any kind– which they say include tax cuts that were previously scheduled to end. It is easy to imagine the same political dynamic occurring in a year’s time as the payroll tax holiday nears its completion.
Particularly if the economy remains weak, as seems likely, few politicians of either party will want to oppose an extension of the payroll tax holiday for another year. Because payroll taxes are taken straight of paychecks, both a reduction in them and then a return to current levels would be highly noticeable to most workers.
Under that scenario, what would happen if the Republican candidate won the presidency? Given the conservative movement’s long-standing hostility toward Social Security, the likely next step would be to make the payroll tax cut permanent, while no longer replenishing the Social Security trust fund to make up for the lost revenue. That basic strategy of slashing the payroll taxes that support the program has been a central plank of right-wing think tanks for decades, but until this point it has never succeeded. As President Franklin Delano Roosevelt anticipated when he created Social Security, the direct linkage between taxes paid and benefits owed has proven to be central to the program’s popularity. Decoupling the two would quickly weaken both Social Security’s financial footing and its still strong political foundation.
Better alternatives to the payroll tax cut that would avoid threatening Social Security, while getting more economic bang for the buck, include continuing the Making Work Pay tax credit that is about to end or further enhancing the Earned Income tax credit. While progressives are right to be chagrined that millionaires would receive a huge tax cut under the agreement, they also should be alarmed about the risks associated with the seemingly innocuous payroll tax holiday.