Thursday, December 22, 2011

It's good to see some brains still functioning...

An editorial from yesterday at USA Today argues that the payroll tax stalemate might be good thing. And in that regard, the editorial board is absolutely correct, since--as I've explained before--the payroll tax cut means that the deficit will be increased, as a matter of course. As the editorial notes:
A one-year extension would drive up next year's federal deficit by more than $100 billion.
 And of course, Social Security is already running at a deficit. Whatever short-term benefits are obtained from extending this tax holiday--in my view, there are none--are easily offset by the long-term costs. It's pointless at best, foolish at worst.

Yet, both supposed "sides" are publicly stating that extending the payroll tax holiday is their end goal, that it's what should be done. As the USA editorial notes, there might very well be some political maneuvering going on in Republican-land:
At the end of next year, the unaffordable Bush tax cuts are set to expire. Extending the payroll tax cut would set a precedent and give ammunition to those who want another extension of the Bush cuts, adding as much as $5 trillion to deficits over the coming decade.
This is a cogent observation, even if the underlying premise--that extending the Bush tax cuts adds to the deficit--is wholly wrong (also something I have explained before).

To be clear on this, payroll taxes and income taxes are not the same kind of animals, when it comes to the debt. Payroll taxes directly fund--on paper--Social Security. Any reduction in the monies collected has to be made up via borrowing, regardless if other spending is cut elsewhere to "pay" for the cuts. So, the debt is increased automatically. Not so with income taxes. First, reducing the income tax rate does mean--as a matter of course--that fewer income tax dollars will be collected in the future, since the situation is not static and changing rates creates incentives that impact the economy. This is reality, and no politician or bureaucrat can honestly claim otherwise. And second, even if there are fewer dollars collected, it doesn't mean the government must go deeper into debt, as not all government spending is mandated by law. Some can be decreased or even eliminated, unlike the monies that must fund the Social Security Trust Fund.

Two very different kinds of taxes, with very different consequences from changing rates.

Still, the USA editorial at least recognizes the reality of payroll tax holidays. And it calls for moving forward with the Keystone Pipeline project, while also recognizing the stupidity of tying the project to payroll tax legislation. Three out of four ain't bad. Kudos to you, USA Today.

Cheers, all.

3 comments:

  1. Well, I think you are somewhat wrong here, Rob. It doesn't matter much where the deficit is increased because money can be shifted around. So, if in some place you make a hole in the budget and propose to "pay" for it in another place, it doesn't really matter in what place that hole happens to be. It's just a matter of internal bookkeeping. But I agree with you on the difference between the two taxes in the insentives they create.

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  2. Well here's the thing Dm, it does matter because of the way the Social Security Trust Fund is structured. The money that goes in is technically off budget, so any shortfall--from a tax holiday, for instance--must be made up with borrowing. Thus, it's an auto-increase on the deficit, no matter what is done elsewhere.

    Sure, it's bookkeeping, but it's mandated by law; it's not a matter of choice for the Feds. And the President and Congress know this, know that it increases the deficit but doesn't decrease federal revenues. It's bad news.

    Cheers!

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  3. Well, again, the key word in your statement is "technically". I understand your point, but in reality the separation between the fund and the general budget is a fiction. And if you need to pay more from the budget to cover the shortfalls in the fund, you can balance these payments by actually reducing (not fictionally, but actually) spending elsewhere in the budget. If US comes to a default or something similar (like the debt ceiling extension again). You are right, there would be differences, because some payments are mandated and some other payments are not and can be cut in such case. I read somewhere that it makes sense for Repubs to support this thing because it hastens in the collapse of Social Security and would force the gov to dal with the issue. Pretty cynical, if you ask me, but does make sense on a certain level

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