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December 22 2011

Before and After: The Payroll Tax Holiday Season

Hadley Heath

Another bill, another game of chicken on Capitol Hill.

The Senate, with a strong bipartisan majority, passed a bill that would extend the payroll tax holiday for two months.  This means that, just like we did in 2011, we'd only pay 4.2 percent of our income to Social Security instead of 6.2 percent.  Leaders in the House of Representatives instead are working to extend the payroll tax holiday for a full year.  If Congress fails to agree on either one of these bills, workers and employers could see their payroll taxes increase.

Some Members of Congress have expressed concern that continuing lower rates for the payroll tax will hurt funding for Social Security.  This is an important concern, since Social Security is already headed for a financial trainwreck, but the concern would be more valid if Social Security kept its finances seperate from the general treasury.  Instead, money that is collected for the sake of funding Social Security can be (and has been) raided by Congress to pay for other expenditures.  Americans are losing their faith in the Social Security system, and while not all of them are ready to call it a "Ponzi scheme," they can easily see that the system is bankrupting itself.

The uncertainty about Social Security isn't good for Amerian families who will rely on this shaky system to fund their retirement. Congress should be persuing long-term, deep reforms to Social Security, but with the current state of political gridlock, that is asking a lot.

Instead, this holiday season's fight is the length of the payroll tax cut extension.  Obviously, a short-term extension is bad for businesses - especially small businesses - who will face the additional administrative cost of adjusting their payroll back and forth to comply with Congress's choice.  Although President Obama has promised to work with Republicans to ultimately reach a full-year extension, businesses can't rely on a political promise to forecast their very real and very soon payroll plans.  The two-month extension would only get us to February, opening up the debate among lawmakers again.

As I've written before, employers and business leaders point to uncertainty as the enemy of economic growth.  Risk is always present in the market, but our government shouldn't be a source of risk.  Our government should be laying the groundrules for business and then stepping back.  Particularly harmful are short-term resolutions and changes to the tax code.  

The Wall Street Journal discussed this hardship for businesses in an article today, with a helpful chart that illustrates just how popular short-term tax changes have become.  From the WSJ article:

The Obama administration's top economist countered Wednesday that the aftermath of the financial crisis and pressure on the middle class remain the biggest problems for the economy. It's "not uncertainty about economic policies, taxes or regulations," said Alan Krueger, the chairman of the White House Council of Economic Advisers, in a speech in Charlotte, N.C.

This statement shows just how out-of-touch the White House is when it comes to the economic challenges our country faces.  Of course fallout from the financial crisis and pressure on the middle class are problems - but where do these problems come from, and what is the solution?  Much of the pressure on the middle class is caused by high unemployment, and worse, long-term discouragement of many workers who aren't even seeking jobs any more.  To fix this, we need real growth, and for growth, we need certainty.  

The government can't (and shouldn't) promise us that we won't fail in a business venture, but the government should provide as much consistency and certainty as possible in tax rates and regulations, and otherwise interfere as little as possible.

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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