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.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com