Now Playing in Congress: The Payroll Tax Follies

Just when you thought the Congress of the United States could not possibly make a bigger fool of itself, its members staged a sequel to the debt limit debacle when at year-end they could not resolve the payroll tax issue. Much more concerned with flying home for yet another of its extended vacations, the Senate voted a short-term stopgap continuance of the reduced payroll deduction, which in two months would have them lock into a scrum and kick the ball back and forth all over again.

Whereupon the House signaled that it would not pass the bill, objecting to the Senate's stripping unrelated measures. In other words, piqued over removal of cherished items that were intended to cut spending still more and thwart the administration's anti-pollution rules, Speaker John Boehner and Tea Pary Republicans House memers showed their willingness uncharacteristically to allow a tax increase that would affect every employee in the land. That's different.

If the bill does not pass, it will mean a reversion to the 6.2% deduction from payroll in place of the 4.2% that taxpayers have enjoyed through all of 2011. Putting more money in their pocket was meant to encourage spending that would purportedly create jobs, although there is disagreement about the efficacy of this approach. It will mean that a family earning $50,000 a year will net $1,000 less in 2012. Two things, though: cancellation of a tax moratorium is not the same as a tax increase. It was a windfall that taxpayers should not expect to continue unless Social Security in their future doesn't matter to them. And let's remember that, by definition of "payroll tax", these are people who at least have jobs.

There are reasons that allowing the reduction to lapse might be just as well. First, the Social Security fund is inappropriately made to pay for this taxpayer bonus with no sign of payback. Second, and a bigger reason, when will this stop? Which party will champion the return to the 6.2% deduction, angering taxpayers? If the special reduction continues, its termination will become viewed as a tax increase. Will this not become an every-year event, with Congress locking horns with the administration, especially if Obama is re-elected? Will we not be breeding a host of Congressional deadlocks, with a perfect storm at the end of 2012 when: (1) the debt limit agreement reaches its end, as does (2) the two-year renewal of the Bush tax cuts, and (3) the annual scuffle over the payroll tax that we are predicting.

That should be enough to spoil Congress' Christmas vacation next year.

This all started when, with every other proposal of his September jobs appeal to Congress thwarted, the President had at least managed to twist Republicans into the unheard of position of refusing a tax cut when he proposed that the payroll tax be trimmed again for 2012, this time by 3.1% (originally for both employees and employers) rather than 2.0%. Realizing that allowing the tax reduction to lapse would infuriate voters, Republicans had to go along with Obama's wishes.

But for a price. The House tacked on a provision that would force a go-ahead on the Keystone XL pipeline, the decision on which the President, fearful of angering environmentalists (see related story), postponed until after the election. "The American people want jobs" that the pipeline would provide, says House Speaker Boehner. The Senate turned that into a proviso that Obama must decide on Keystone XL in 60 days. Obama caved and said he would — a nervous tic of his. That was before Boehner and the House defied the Senate.

But the pipeline will be in the payroll tax bill once again in two months, and the President will allow it to be fast-tracked; somehow two months of review rather than a year will magically prove to be sufficient to allay all concerns. Credit for the payroll tax cut will accrue to him, thanks to Republican blundering, and he'll figure that angry environmentalists will have nowhere else to turn come November.

As to the payroll tax, we have a heretical idea which would nicely solve the problem of the Social Security Administration having to foot the bill for all this political largesse.

First, the payroll tax is our most regressive tax by far. A higher percentage of one’s annual income is paid by lower income workers than by those making higher incomes. That is because it is levied against every dollar earned by the average worker, but is no longer subtracted once anyone’s income passes $106,800 during a calendar year, no matter how large that income becomes. The more money one makes, the less the tax as a percentage of income, until it ultimately shrinks to infinitesimal. At the extremes, those investment bankers and corporate CEOs who are paid, say, $10,000,000 in a year are done paying their Social Security tax on January 4th, after just three days on the job, whereas the average working stiff pays it all year long. And those who make their money from investments rather than a paycheck pay nothing at all.

So to keep Social Security money coming in, how about this idea? OK, it's whimsical, but ethically satisfying. For all these years, ever since Social Security began, those who made more than the cutoff — this year’s $106,800 — have had a free ride on that extra income. During these difficult times when the payroll tax is so burdensome for the average citizen, why not turn the tables. Charge no payroll tax at all until the $106,800 is reached; then charge the 6.2% only on all income that exceeds that threshold. Employee only.

It’s a perfectly fair idea that does something to redress the inequities that have favored higher income people for so long. Of course, it will go nowhere in Congress. But their protests and its defeat would demonstrate how Congress “coddles” those who make the most money, to use Warren Buffett’s word, and we would get to watch the comedy of whatever contorted logic they come up with to justify their opposition.