Payroll Tax Holiday or Horror Show?

Written by

Meizhu Lui
Meizhu Lui Meizhu Lui took the mantra “Educate, Agitate, Organize!” as the theme for her life’s work. As a hospital food service worker and union activist, she organized to demand that “women’s work” not be undervalued and underpaid, and to challenge occupational segregation. Later, as a community organizer for Health Care for All Massachusetts, then as Executive Director of United for a Fair Economy, and finally as Director of the Closing the Racial Wealth Gap Initiative, she became known for her outspoken activism in ending race and gender inequities.

President Obama and Congressional Democrats want to extend the payroll tax “holiday” for another year, which would allow workers at all income levels to continue to pay the 4.2 percent rate instead of the 6.2 percent payroll tax they paid before 2011.

This decreased tax rate allows people to increase their consumption and spending patterns, thus stimulating the economy (presuming they are not using the “extra” money towards savings or paying down debts).  Sounds rational enough. But what will we have to give up in the long run? Specifically, will the short-term boost to the economy be worth putting our Social Security program at risk?

While most Americans strongly support Social Security most are unclear as to how it operates. Continuing to cut payroll taxes, the sole source of funding for Social Security, and proposing to expand funding through an income tax on millionaires, deepens misconceptions about how Social Security is funded and renders the program readily vulnerable to privatization.

First, the payroll tax holiday obscures the fact that Social Security is an insurance, not an entitlement, program.  The payroll tax operates like an insurance premium, in that workers pay their contribution to become eligible for Social Security retirement, disability, and survivor benefits.  Most Americans cannot imagine their car insurance company allowing them to take a break from paying premiums without seriously risking their ability to receive insurance benefits should they get into an auto accident or their policy being canceled all together.

Second, the payroll tax holiday supports anti-government advocates who typically argue that the best way to stimulate the economy is to cut taxes. If letting people keep more of their money helps create jobs, as their argument goes, then many will wonder: why not cut more taxes, including for the rich who have the most money to spend?  Although it has been shown that tax cuts do not lead to economic growth or job creation, using this logic for the payroll tax “holiday” may lead many to press for greater tax cuts, particularly for the wealthiest Americans.

Third, while the Social Security Trust Funds do not face any immediate danger, they do have long-term solvency issues.  Allowing workers to reduce their contributions for longer periods of time will give opponents of the program ammunition for proposing deep cuts in benefits to make up for shortages in the Fund.

Fourth, surveys have shown that the Social Security program is so popular that people would be willing to pay even more than the 6.2% payroll tax rate in order to maintain the current level of benefits.  However, now that the payroll tax has been cut by 2%, the argument will shift to re-instituting the 6.2% rate, instead of focusing on new ways to raise the funds necessary for ensuring the program’s long-term solvency. The “holiday” also steers attention away from other legitimate ways to stimulate the economy, particularly the task of real job creation.

Finally, President Obama and Congressional Democrats wants to make up for the decline in revenues associated with the payroll tax holiday to the Social Security Trust Fund by raising income taxes on millionaires.  While many of us would agree with the progressive thrust of this argument, it would violate the original operating principles of the program. The self-reliant structure of Social Security is largely responsible for the endurance of the program; mixing in income tax revenue would not only represent an enormous change in principle, but would also make Social Security vulnerable to broader budget threats.

While the effect of the lower payroll tax on job creation (supposedly the main reason for the “holiday”) has not been proven, it is clear that voters like having extra money in their pockets. In a critical election year, this could be construed as President Obama and Congressional Democrats buying political support.  However, given the likelihood of continued attacks on Social Security, a program that keeps millions of elderly, disabled, and dependent survivors out of poverty, making the extension of the payroll tax cut a major piece of the president’s economic stimulus plan could turn into more of a horror show than a holiday for the American people.