Contrary to all the hype about “saving” the middle class from tax increases, taxes did go up on people making less than $400,000 per year, as part of the fiscal cliff deal. The primary vehicle for this tax increase is the end of the 2 percent “payroll tax cut” implemented in 2010.
This was never a true “tax cut.” It was a raid of Social Security funding – a cut in the Social Security tax on employees from 6.2 percent to 4.2 percent. There was to be no corresponding loss of benefits to American workers who enjoyed this funding cut. Social Security doesn’t work that way anyway – it is falsely presented to the public as some kind of individual retirement account built up over a lifetime, but in fact it’s a straightforward welfare program, with current workers funding the benefits of current retirees. Congress ended up diverting funds from other areas to cover the shortfall, so those nervous about the solvency of Social Security – notably the AARP – tended to describe the payroll tax cut as a “threat” or “risk” to Social Security funding.
President Obama was strangely silent about the end of the payroll tax cut that he once defended so vigorously. In fact, he used to push for the extension of his tax cut with the same kind of overheated hyperbole and human stage props that he used during the fiscal cliff drama. In February 2012, he launched a Twitter hashtag called #40Dollars to whip up public support, named after the amount of money that would be taken from weekly paychecks if the tax cut expired. He marched a number of people who responded to his Twitter campaign on stage to declare, “This is a make-or-break moment for the middle class. The last thing we need is for Washington to stand in the way of America’s comeback… this is the least of what we should be doing for working Americans.”
CNN wryly noted that “if you think this event looked familiar, it did: the President held a nearly identical event two months ago when Congress was last debating extending the tax cut.” On that occasion, Obama was actually questioning the patriotism of anyone who would dare oppose an extension of this vital lifeline to the Sainted Middle Class. “Let your members of Congress know where you stand!” he thundered during a radio address in December 2011. “Tell them not to vote to raise taxes on working Americans during the holidays. Tell them to put country before party. Put money back in the pockets of working Americans. Pass these tax cuts.” He insisted that Congress “shouldn’t go home for the holidays until they get this done.”
And in November 2011, Obama tried to pull the spotlight away from the GOP presidential primary by popping up in New Hampshire to say that the payroll tax cut should be extended “in the spirit of Thanksgiving,” sneering at critics of the plan: “Don’t be a Grinch.”
The payroll tax cut figured in Obama’s rhetoric just about every time he discussed job creation or raising the debt ceiling. And take a look at this web page from Obama’s 2012 presidential campaign, in which he boasts of having “saved” the “typical American family with children” $3,600 over the past four years, and promised that if re-elected, they would “continue to save $2,200 next year.” In contrast, Mitt Romney would supposedly make them “pay over $2,000 more” – a despicable lie based on one of those fantasy “tax policy studies” that assumed Romney’s proposals could not be carried out without raising the deficit, so it pretended to read his mind and divine what he really intended for the middle class. But here we are in January 2013, and under the re-elected Barack Obama, middle class taxes just went up… by a bit less than $2,000 per year.
So that #40Dollars doesn’t matter any more, huh? Are we allowed to turn Obama’s rhetoric against him, and question his patriotism for raising taxes on working Americans during the holidays? Is he a Grinch now? By all accounts, the White House never even tried to extend the payroll tax cut. A few weeks after the election, the Huffington Post reported “the White House has gone almost completely quiet on one of its favorite stimulus policies. In a report released Monday morning, the Administration warned that middle-class families will pay thousands more in taxes next year unless Republicans relented on income tax breaks for the rich. But the report didn’t mention the soon-to-expire payroll tax cut.” White House advisers refused to support extension of the cut, perhaps in part because they didn’t want it discussed in the same breath as the Bush tax cuts that Obama was suddenly so eager to “defend.”
The actual benefits of the temporary payroll tax cut to the economy were somewhat debatable. Back in July, the Wall Street Journal quoted one economist saying “it’s been a bit of a lift, and its ending would be a bit of a drag,” while another judged that while “existing workers have more income, and that helps,” the tax cut “has not stimulated job creation.” Some critics of the measure pointed out that if the objective was job creation, it would have been more effective to reduce the employer’s side of the Social Security tax, which is split between employer and employee, in a paperwork fiction designed to make taxpayers think the Social Security tax is half its actual size. But of course, reducing the payroll tax paid by employers would have been a tax break for the Evil Rich and Evil Business Interests, so that was out of the question.
Last month, as the fate of the tax cut hung in doubt, CBS News relayed an estimate from JPMorgan that its termination would “reduce U.S. disposable income by $125 billion,” which the chief economist of Goldman Sachs projected “would reduce 2013 GDP by 0.6 percent.” Consumer spending has been a particular concern for economists lately – the Christmas season was disappointing for some retailers, and GDP growth for the next few quarters is not looking good. This might not have been the best time to drain $125 billion of disposable income from consumers. But as long as the government doesn’t get any smaller, that’s what really matters, right?
The noisy life, and bizarrely quiet death, of the payroll tax cut should serve as another lesson in the folly of “temporary” tax cuts. Early critics of the measure said it was a gimmick that distracted the public from effective, permanent pro-growth tax reform, and it couldn’t be left on the books as a threat to Social Security funding forever. We live in a world of invincible, permanently growing government programs that can’t even be trimmed back, let alone killed when they prove to be failures, coupled with “temporary” tax cuts we lose unless we fight like wildcats to keep them… turning against each other in a panicked frenzy of class warfare when we’re told we can’t keep all of them. Enjoy those lighter paychecks, middle class Americans!