The temporary payroll-tax holiday that Americans currently are enjoying now looks like a full-time component of the U.S. economy. So, it might as well be put to better use. Congress should let payroll tax-cut recipients place some or all of this money in voluntary personal retirement accounts.
The payroll tax holiday was designed as a one-time measure to stimulate the drowsy economy. It reduced the individual portion of the Social Security tax from 6.2 percent of wages to 4.2 percent. Washington encouraged Americans to spend this money to increase aggregate demand and, thus, give the economy a badly needed kick in the rear.
But a funny thing happened after one year. As the temporary holiday approached expiration, few in Congress or the White House wished to be seen as hiking taxes on working people. With votes on this matter scheduled around Christmas, who wanted to play Scrooge to the middle class?
So, after some loud wrangling over amendments on the Keystone XL Pipeline and other matters, Congress voted to keep the payroll tax holiday alive for another year. At a total cost this year of roughly $112 billion, this adds up to about $700 in average tax relief for some 160 million workers.
Most likely, this initiative now is a permanent part of the tax landscape. Having returned to the American people 2 percentage points of their Social Security taxes, Congress probably never will have the nerve to take this away.
Like cement freshly poured from a Ready-Mix truck, temporary taxes have a habit of becoming as hard as a sidewalk.
“Year after year, many of these ‘temporary’ tax cuts are extended,” writes David Morris, a contributor with Engage America, a new organization that promotes fiscal responsibility and economic prosperity via social media. (I now am a Thought Leader with this group.) “Would you believe that not only are there more temporary tax cuts on the books today than in 1998, but that some of the tax cuts from 1998 are still part of the tax code? Believe it.”
Morris cites Scott Hodge, president of the Tax Foundation, who observes:
“This is going to become permanent law…Once these things get built in, cooked in to the system, they’re awfully difficult to get rid of.’”
There is just one small problem with this tax cut: The money has been borrowed from the Social Security system.
Imagine a city that takes money from its police department pension fund and then hands cops cash in hopes that they will spend it in local stores. Like it or not, the federal payroll tax holiday operates on virtually the same basis. At some point, Washington is supposed to go borrow money, most likely from China, to replace the funds it has removed for this individual tax relief.
One smart way out of this jam, at least partially, is to give Americans the option of investing some or all of their tax-cut money in voluntary personal retirement accounts. They could get credit for these funds against the amount of money that Uncle Sam would have to replace in their Social Security accounts. This would reduce, by an equal figure, the amount that Washington would have to go out and borrow via Treasury bonds. And American citizens, not politicians, would control these accounts.
As it stands, any American can take his entire payroll tax cut and invest it in six packs of Schlitz, cartons of Marlboros, and state lottery tickets. Why not give this individual the option, say, to keep the suds and smokes but put the lottery money into a stock portfolio?
Democrats get very twitchy when it comes to letting Americans invest their own Social Security money. So, Republicans should put them to the test: Since such accounts would be 100 percent voluntary, would Democrats actually vote to let Americans do anything with their tax cut money except salt it away for their golden years?