Monday, December 5, 2011

The payroll tax reduction: Only in Washington does this make sense

File this under the "I don't get it" category. We all know that social security is in trouble. It is a pay as you go system with current receipts paying current recipients. At some point in the near future, the payments to the recipients are projected to exceed the receipts creating a shortfall that must either be made up with tax receipts or decrease benefits. So why did the congress reduce the payroll tax? This reduces the projected payments into social security by $265 billion. Won't this make the day of reckoning even sooner? To add to my confusion, the president has advocated that the payroll tax reduction continue for an additional year. You can imagine my surprise when I heard him say and other dems repeat that increasing the amount of money in the hands of Americans is critical during these days of economic crisis. Of course if they really believe this as opposed to it being a mere talking point, they would make permanent by Bush tax rates and move to lower income taxes across the board (even to the so-called 1 percent). Since a reduction in taxes on a permanent basis leads to increased income, the result will be more paid into social security rather than less. Thus, what should have been done is to leave the payroll tax rate alone and to reduce income taxes instead. Only Washington could screw things up this badly.


Anonymous said...

love your articles, but disagree with permanent bush tax cuts. The wealthy have so much disposable income now that they aren't spending what they have, so in my humble opinion that will not help, unless we cut the budget to they level of taxes recieved. One of the few times we aren't on the same page. tom

H.A. Black said...

Tom, Lets agree to disagree. We should not want the wealthy to have the same propensity to consume than the nonwealthy. We need them to save. Savings beget investment which begets economic growth. Taxing them more never has resulted in more tax receipts and often less as they have increased incentives for tax avoidance.