You know we’ve had a social security tax cut this year. The normal bite from our paychecks is 12.4%, 6.2% each from the worker and employer or the full 12.4% in the case of a self-employed individual. These are the levels it will revert to if the government does nothing. The effective level for this year has been 10.4%.
The GOP generally favors simply extending this tax cut for another year and paying for it by cutting government spending, specifically federal employee benefits and compensation. The Democrats want to extend and expand it while funding it with tax increases in the upper income brackets. Since both sides agree on at least extending the tax cut, I think the extension will ultimately happen despite Thursday’s failures. The remaining questions to address are whether to expand it and how to pay for it. I also think the question of how long to extend it should be on the table, but it doesn’t appear to be because both parties appear to be content to stay at one more year. This acceptance of one year fails to surprise me because next year is an election year.
Thursday’s failure to pass the bill doesn’t surprise me in the least, either. This is merely business as usual in Washington. You know the drill by now. Politics is show business for ugly people and the politicians’ main focus is obtaining/retaining power, so poll numbers and fund flows dominate. By creating unneeded drama and tension, they’ve created a crisis that allows them to swoop in and save the day, which helps attract votes and funds. Crisis creates catchy headlines and a sense of urgency. They want you to remember that they acted to avert disaster, but forget that they caused the disaster. Additionally, we have to worry about what they're doing in other matters while the issue in question dominates the headlines and national consciousness. It’s the same darn story played out over and over. One of these days, I’ll do a single post explaining these dynamics and just keep linking back to it instead of having to retell the tragic tale once every couple months with minor changes in details (names, dates, issues, etc.).
Personally, I favor a multi-year extension and expansion of this tax cut. I’d like to see it increase from 2% to 3.1% on a worker’s first $106,800 of income. I wouldn’t mind seeing the further expansion into the business side. Regardless of whether it’s kept as is or expanded, I think it would be a more effective economic stimulus if it was extended for more than one year. The main reason I think it would be more effective with a longer extension period is we wouldn’t have to go through this struggle again next December. Bracing for a pay cut, even if it doesn’t come to pass, sours a person’s mood and puts a kink in budget planning. If you think you may have less money in your paycheck next month, you’re going to at least contemplate some budget tweaks. Extend it for even two years instead of one year and we reduce that psychological and planning dampener effect.
Extending and/or expanding this tax cut will worsen the long-term state of social security in that it will draw down the Social Security Trust Fund (SSTF) and it will worsen the deficit/debt situations. By putting less money into the program now, we would be pulling forward the day of reckoning for social security and we would have to make up that money somewhere. I didn’t want to completely gloss over the long-term considerations because we do have to recognize that this will matter in the future, but I don’t want to spend too much time on them in this post, either. A discussion of the longer-term picture of social security is a series of posts in and of itself.
The way I see it, there are two choices of how to pay for it. The GOP wants government spending cuts on federal employee compensation costs and the Democrats want tax increases on the upper class. Yes, it’s the usual question of funding something by cutting spending or raising taxes. Some combination of spending cuts and tax increases is the most likely outcome, but I would expect it to lean more on the spending cut side. Too many in the GOP are trying to stand firm on refusing to support any tax increases, and by paying for a temporary tax cut for some with a tax increase to others, they would likely run afoul of that position. If the Democrats seriously want to extend and expand the tax rate, then I’d look for an even greater portion (possibly all of it) to be funded by spending cuts over tax increases.
The bottom line is we shouldn’t be too worried. I expect we will get at least a one-year extension of the tax rate. That’s a given because both sides agree, in my view. Any extension beyond one year isn’t really on the table. Where the bargaining is going to come in is on the questions of whether to expand it and how to pay for it. Whether the expansion is successful or not, I think the Democrats will have to cede some ground on the funding question. Obviously, they’ll have to cede more on the funding question if they want the expansion.
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