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.