Washington Shopping For Themselves This Christmas

Today’s Courier Herald Column:

There is something unique about politics conducted during the holiday season. Partisan arguments that dominate January through late November are often set aside. Lawmakers of both parties often drop their key talking points, and work together to pass multiple pieces of year end legislation that were backed up during gridlock when voters were paying attention.

The season of giving can have a strange effect on even the most hardened, Grinch like politicians. This season is no different. Members of both parties are now desperately are working to ensure that tax cuts are extended to provide much needed Christmas gifts – to themselves. After a year of battling the deficit, threatening to shut down the government every few months, maintaining uncertainty throughout all facets of the economy so that businesses couldn’t forecast future conditions and hire accordingly, Congress will now spend December trying to find ways to extend and sweeten various tax cut packages to make sure they can claim their constituents have more money in their pockets during next year’s elections.

Congress and the President are once again participating in the time honored tradition of buying our votes with our money. Except, as we all know by now, the government is already borrowing almost forty cents for every dollar it spends. So in reality, the votes that they’re trying to buy are with borrowed money. It is through this prism that we should evaluate the various proposals for yearend tax cuts.

At the heart of the matter are payroll taxes. In the brief harmony that existed between the Democrats drubbing in the 2010 elections and the Republican majority’s swearing in this January, President Obama and Congress agreed on a one year cut to the employees’ contribution of FICA payroll taxes. Every wage earner received an extra 2% in their paycheck for the first $106K of earnings this year.

The idea was made possible by an intersection of Republican supply side economics and Democrats insistence that tax cuts benefit the lowest income taxpayers. Yet with the Bush tax cuts having removed enough Americans from paying income taxes to the point that now roughly half the country does not pay income taxes, the best way to cut taxes paid to low income wage earners was to start hacking at FICA.

One of the problems with this approach, however, is that at least conceptually, FICA is supposed to be funding a trust fund for Social Security as well as Medicare funds. Both are insolvent and in need of reform, which has been at the crux of the budget battles for the past year. But the big talk of deficit reduction is no match for an elected official to give away what does not belong to him or her, so sometime in December, Republicans and Democrats will come together to make the problem worse before they resume endless debate in January on how to fix the same problem.

For their part, Democrats want to double down on the cuts, increasing the employees’ FICA reduction to 3.1% as well as add a cut to the portion of the tax paid by employers. To pay for the one year cut, Democrats want to increase taxes on incomes above $1M by 3.25%. The one year cost of the tax cut is $265 Billion. Note that when spending cuts are generally proposed, Congress now likes to take credit for a mythical ten year effect, but when the cost of spending increases or tax cuts are floated, it is in one year terms.

Thus, the SuperCommittee just failed to find a trillion dollars in spending cuts over the next ten years, despite months of working on the issue. But in a couple of shortened work weeks peppered with holiday events, Congress stands ready to consider and additional $2.4 Trillion increase to the budget deficit, presuming “temporary” tax cuts can never be repealed. After all, the 2010 tax cuts were supposed to be temporary, yet the current discussion isn’t whether or not to extend them, but how much to increase them.

The cost of buying votes is increasing, but luckily for us, the European financial markets remain in shambles. As such, world capital continues to flow to U.S. treasuries. Thus, Congress’ credit card remains open for their Christmas vote buying shopping spree.

The return window will not be open for us to return this gift in January. There will, however, be voting booths open in November. Take some time during this season to pay attention to the activities in D.C. Some gifts headed our way look nice, but we all know there are limits to what we can afford.

9 comments

  1. Dave Bearse says:

    I think Democrats cutting FICA will only hurt themselves by undermining Social Security as insurance. Turn Social Security into a welfare handout program, and it’s finished as we know it. Increasing in the standard and individual and dependent exemptions would have been better.

  2. SallyForth says:

    The Republicans never had a “tax bill.” It was a job destruction bill that would have disappeared 200,000 more US jobs – but definitely protect their wealthy buds. But they’ve had control of the spin machine for over 30 years, now figure they can say up is down and nobody will question.

    People need to wake up and realize that, organized or not, if you have a job, you are a worker. Getting the most work possible out of you at the cheapest price is what it’s all about. And if you don’t like it, you can be on the streets and your job go to India or elsewhere. But Lordy, don’t ask the fat-cats to give back the tax give-away Bush handed them – that might make them feel a little of what their fellow Americans are going through.

    Roll back the Bush tax give-away to the wealthy and this whole FICA problem for working folks would disappear.

    • Dave Bearse says:

      Sally:

      They may’ve controlled the spin machine for years, but the 2012 GOP primary may be indicative of the unraveling of the usefulness of spin and control.

      The GOP establishment has spent 30 years helping to undermine public confidence in the media, government, and general political establishment. It is firmly behind Romney based on Romney having more political endorsements than all of the other candidates combined (and his continuing to increase that majority), yet only 20% (the establishment GOP base?) of GOP voters support Romney, and that number is going nowhere.

      After 30 years the GOP rank and file doesn’t trust any establishment or the channels of establishment communication. The GOP establishment appears to be losing control of the primary process to GOP elements that support candidates without an ice cube’s chance in a general election (a circumstance corresponding to the Dems did in the 70’s and 80’s). This circumstance is one among many reasons why I think it increasingly unlikely there will not be a GOP President for a long while without a GOP course change. (Carter was an exception because of Nixon’s corruption which is to say unusual circumstances may likewise produce a GOP exception without a GOP course change.)

      On another note it will take a lot more than rolling back Bush tax cuts for the rich to fix Social Security beyond the short term. Eliminating the cuts fixes Social Security short term because benefits paid currently little exceed FICA revenue. The new revenue would thus be adequat to replace trust fund paper for only a little while.

  3. saltycracker says:

    Pieced & edited from my earlier post on SS:

    The SS tax is an insurance payment by the individual employee & employer, albeit a ponzi one as the premiums aren’t invested for the future as intended. Cutting the premium or supplementing it with taxes on OPM is smoke and mirrors.

    When taxes go into one big pot you can say anything.
    Reducing FICA/taxing someone else is a non sequitur fraud.
    So is bringing Bush cuts into the equation.

    This is a scheme to turn an insurance program into an entitlement program with little accountability – next step, everyone gets the same regardless of contribution –

    Meanwhile the fraud increases, particularly with disability – walk into any SS office in metro Atlanta & count the seniors……not many…..

    How can the idea of premium reduction even be on the table for discussion until a set aside program is funded to all participant revenue contributions plus 30 yr. treasury earnings and we see a massive surplus ?

    Republicans thinking premium reductions are a fiscally sound approach need to resign or be voted out. Did they learn anything from their cuts in unemployment insurance collections ?

    • saltycracker says:

      Which brings us to a RINO idea for Georgia:
      Have the insurance commission require ALL premiums be means tested:
      Start with reducing all car, property policies 25% or more and allow offsetting surcharges on luxury vehicles (over $50K) and properties ($1 million +)…..

      Now we have car driving, property owners with more money to spend !!!!

    • Harry says:

      Good, thoughtful comments. SS is a social entitlement program. In my opinion, one concept flaw was foregoing of individual accounts as is done with private sector qualified plans. Now the only fix will come from congressional appropriations, which is politically difficult (young vs old) and will lead to inflation and dollar devaluation. What’s new.

  4. SallyForth says:

    You guys all give good food for thought – thanks. Harry, I’m not sure about lumping SS in with entitlement programs, which we usually think of being things like welfare, medicaid, WIC, corporate research and development grants and subsidies, etc. of the programs that involve simply giving away money with no preceding investment by recipients.

    SS is a unique program that everyone who works pays into all their working years, a sort of government-administered annuity insurance program. It is also an inter-generational compact through which each generation ensures that their elders do not sink into destitution when they get too old to work. I personally have a problem that it has been expanded to pay out to people who claim disability at younger ages (many of whom could actually perform some sort of gainful employment), as well as providing benefits to children – these should be addressed via their own separate programs, not eat into the specific purpose of SS, senior citizens.

    Disability and children coverages should be bifurcated from the SS program, and Congress should set up whatever provisions they deem appropriate for funding those activities – perhaps disability under the Labor Dept. and children under Health & Human Services. But NOT sucked out of SS funds. We should be able to discuss SS in terms of its original and overriding purpose – its structure and present FICA would be more than adequate into infinity, totally self-sufficient.

    Then rolling back the Bush tax give-aways would allow us to start paying back our “deficit” – big fat loans from China and Japan, a large part of which had to be borrowed to fund the Bush tax cuts in the first place, along with the $2 billion a day he stuck to us for these 8 years since he attacked Iraq (who did nothing to us!). But that’s a whole different discussion.

    Heck! Serious depression – the Dawgs got their butt handed to them this evening, so I’ve got to put my brain to serious thoughts, like “What would Munson do?”

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