#PayrollTaxExtension: Lessons and Conclusions

A House-Senate Conference has agreed to avoid once again sound solutions to the fiscal woes on the nation. In agreeing to extend the employee portion social security 2 percent tax reduction until the end of the year, extend long-term unemployment benefits and make sure physician’s Medicare payments are not reduced, both political parties can claim victory and eliminate political backlash at the same time.

The cost is a measly $100 billion added to the deficit. The country has the Chinese to thanks for providing the extra-borrowed money.

Since passing a 2-month extension of these programs in late December, Republicans and Democrats have been vexed on how to find a way out of a box. Both side wanted to get these political thorns out of the way. But, how?  Easy, just charge it.

The employee payroll tax reduction was put in at the end of 2010 for one year as a trade off for extending the Bush tax cuts for two years. It was designed to be a further temporary economic stimulus. It was not good tax policy and many economists believe it is marginal economic policy. What it turned out to be was real money in the pockets of taxpayers who did not want to give it up and a fiscal and political hot potato. It costs money and it used general funds instead of dedicated taxes for the sacred Social Security Trust Fund. 

From a political point of view, enacting the extension in the short-term is probably right thing for both political parties.  Democrats can say they are for the “middle class” and Republicans can't be criticized for standing in the way. From an economic standpoint, it is marginal decision at best but given the fact it was increasing net take home pay, I have said, another year is desirable. However, I believe it is a mistake to place all the cost directly to the deficit.  

The cost of all this good bi-partisan cooperation is about $160 billion of which about $ 50 billion will be recouped over the next 10 years through a myriad of nifty budget games, like selling more radio wave band, some Mickey Mouse pension contributions changes for federal employees and some meaningless health care changes.

In spite of the agreement, it is not a certainty both House of Congress will pass the legislation scheduled for a vote in the next few days. I believe it will pass but then again, surprises are not uncommon.  However, the interesting part is not the substance but the lessons and conclusions, many of which we already know, as a result of the deal.

• Democrats have absolutely no interest in the deficit. They either do not realize the dangers of the $1 trillion a year deficits or simply do not care.

• Republicans made at least an effort to pay for the expansion of Government but will capitulate in the face of political wrangling.

• The Social Security employee payroll tax cut will not go away. The current agreement lasts only to the end of the year, and then what? Another extension? 

• The expiration of the Bush tax cuts is bigger than ever. No ducking the issue.

• The package does not include the tax provisions that expired at the end of 2011 and coming up at the end of this year, some 150 or so in all. These are the famous “extenders” and payroll tax relief extension was the best and most logical place to accommodate some of them. They will have to wait consideration or just go away.

• While it was encouraging to have a real “Conference” between the two legislative bodies, the chasm between House and Senate is a wide as ever.

• Majority Leader Harry Reid (D-NV) is an incredibly partisan and ineffective Senate Leader. His only goal is to try to “embarrass” Republicans. Watch out, Senator, next Congress could be pay back time.  House Speaker Boehner has his own set of problems.

• Senate Finance Committee Max Baucus (D-MT) has become a pawn for the left. He should know better. He never really considered any way to pay for the tax cut.

• Eventually, there will be a fiscal judgment day. Not this year, but sometime and the longer our leaders put it off, the worst the remedies will be.

There you have it. More politics, short sighted policy and delaying the inevitable. In all of this, the most important is how important the results of the next election will influence direction of the country.