GOP should support reduced payroll tax

President Obama and Congress should immediately extend all of the current marginal income tax, capital gains and dividend rates. They should also extend the two-percent reduction in the payroll tax rate, which ostensibly goes toward Social Security. In a Twilight Zone script, Democrats want to extend the reduced payroll rate and Republicans think it should be allowed to expire. The Republican position is an error of both politics and policy.

The 12.4-percent payroll tax is evenly split between employees and employers. In 2010, the employee share was reduced from 6.2 to 4.2 percent. That reduction was originally slated for only one year, but after a protracted fight in late 2011 and early 2012 the reduction was extended again. It is currently set to expire at the end of 2012. Throughout this process most Democrats have been pushing for lower taxes, while Republicans have been dragging their feet. 

First: the politics. It makes no political sense during a high-wire act over the fiscal cliff for Republicans to attempt to draw a distinction between marginal rates on high earners and payroll rates on more than 160 million Americans. They have tried to do this twice before and failed. There is no reason to think this time will be any different. Leaving the payroll rate reduction on the table for the Left to use as a political bludgeon is a mistake. The president included a one-year extension in his opening bid last week. We should expect to see him hammer this proposal for the next three weeks. However, politics is the least important reason the Right should support the extension. They should support it because it moves the nation in a good direction on serious Social Security reform.  

Although conservatives should support an extension and perhaps even a permanent reduction in the payroll tax rate, they have been reticent to do so for two reasons. First, they fear it buys into the Left’s Keynesian stimulus arguments. Over the weekend on Meet the Press, House Budget Committee Ranking Member Chris Van Hollen (D-Md.) supported extending the reduced rate because it “has a way bigger impact on the economy” and because it “gives you the most bang for your buck economically speaking.” Van Hollen’s support is based on the same aggregate demand argument that failed during the President’s first term. Although he has the policy right, Van Hollen supports it for the wrong reason.

The second reason some on the Right have been hesitant to support the extension is because they still refuse to admit that there no assets in the Social Security trust fund. In November 2011, Senate Minority Whip Jon Kyl (R-Ariz.) said, “The problem here is payroll doesn’t go into general revenue, it supports Social Security, and you can’t keep extending the payroll tax holiday and have a secure Social Security.” But that’s exactly the point. The nation does not have a secure Social Security program because Washington has raided the entire trust fund; there is nothing left. 

Those committed to reforming Social Security must expose the myth that there are valuable assets in the “trust fund.”  Senator Dick Durbin (D-Ill.) repeats with furiosity that “Social Security has not added one penny to the deficit.” This is demonstrably false. Even the Washington Post recently admitted that the program is cash flow negative, and that’s even after ignoring $79 billion general fund backfill during 2011 to hide the reduced revenue from the payroll holiday. Not only is the program cash flow negative but it also has no real assets to finance its way through the red ink. The so-called trust fund has nothing in it to redeem. If there were real assets in the fund Durbin would be right, Social Security would not be adding to the deficit or debt; it could merely dip into its bank account to cover the shortfall.  But that’s not what happens. 

The securities can only be sent to Treasury who must then subsidize the program with either general fund revenues (not an option because the FY2012 deficit was $1.1 trillion) or by borrowing via issuing real bonds, which is what they’ve been doing. The reduced payroll rate merely exposes this fiction at a faster rate. The sooner the public comes to grips with the fact that Washington has spent every dime out of the “trust fund” the sooner we can move to fix the broken system.

The lower payroll rate should be extended because it allows 160 million Americans to control another two percent of their paycheck and empowers them to provide for their own retirement. It has been clear and consistent conservative economic policy for decades that the way to solve Social Security’s financial woes is to transfer control of individuals’ paychecks away from the politicians who have demonstrated that they cannot be trusted not to raid the funds. The currently reduced payroll tax rate does that and it is the first small step toward entrusting people to control their own money. We should extend it immediately, along with all the other lowered rates.

Valvo is director of policy at Americans for Prosperity.

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