Why We Should Permanently Eliminate the 2% Payroll Tax Surcharge
Written by Sara Dustin
Guest Author, Progressive Press
A Washington Post article titled “The payroll tax hike wiped out a year’s worth of wage gains” reported that the restoration of the 2% payroll tax surcharge, as part of the fiscal cliff deal, will wipe out all of last year’s wage gains. Maybe the amount subtracted from each paycheck is small, but that is the minimum total amount of lost consumer spending. The ending of the payroll tax surcharge holiday will cost the struggling U.S. economy every year.
Unfortunately, when Congressional Democrats extracted a small increase in the tax on the wealthy, at the expense of a 2% tax increase on the people who are employed by them, the sweetener did not just slow down the recovery. It also damaged our social health. It reinstated a stealth shift of the cost of financing the federal government, from the very-well-off, to the rest of us, which has been underway ever since the surcharge was first imposed in 1983, and which has contributed to the growth of economic inequality. To understand why, it is necessary to review a little history.
A 4% surcharge, evenly split between worker and employer, was added to the payroll tax when calculations performed in the depths of the 1980-1982 recession predicted the imminent collapse of the Social Security system. When the economy recovered, in the mid-1980s, the tax began to generate large sums of money that were no longer needed to finance the benefits, due to the larger numbers of workers from whose paychecks it was extracted.
Instead of banking these funds, they were loaned to the the federal government, via U.S. Government Bonds, for deposit in the Social Security Trust Fund. The designers intended to build a spendable reserve large enough to see the program through the baby boom retirement bulge without reducing retirement and survivor’s payments.
The restoration of the 2% surcharge does not increase federal revenues, as the press has erroneously asserted, because the proceeds of the tax belong to the Social Security System, not the U.S. government. Instead it will increase the amount the U.S. government borrows from American workers, via bond purchases for the Trust Fund.
That loan already totals $2.7 trillion dollars. It is 2 1/2 times our debt to China. And though the bookkeeping does not show it, it is equal to 12% of the official national debt. It makes the working people of America one of the federal government’s major creditors.
By any straight forward accounting, the reinstatement of the 2% payroll surcharge accelerates the growth of the national debt. But the social consequences of the renewal of this tax are far more dangerous. For when we, the workers, buy U.S. government bonds for the Trust Fund, the money we loan is spent by the government in the same year it is received to meet the immediate demands of the federal budget. Because it has been able to borrow surcharge money from us every year since the mid 1980s, the government has not needed to raise as much revenue from other sources.
Our purchases of bonds has helped finance cuts in taxes on capital gains, large corporations and stratospheric incomes. The surcharge has transferred more of the burden of supporting the federal government from high income families, enjoying reduced tax rates, to middle and low income employees paying higher payroll taxes. The surcharge amnesty corrected this regressive shift.
As our economy recovers, the date when the Trust Fund must be tapped will resume its retreat into the future. The current effort to cut benefits and delay eligibility—–heavily financed by wealthy individuals whose taxes might be raised to redeem the bonds—–seems designed to delay that event indefinitely. By seeking to shrink the system’s annual benefit bill to the currently predicted size of its future revenues, the proponents are, in practice, arranging for the fund to grow endlessly and the Government to avoid ever paying its debt.
It’s time to worry less about feeding the fund and more about how to spend it. For if it is not used, it remains an empty promise and a dishonest imposition on American workers. If, ten years down the road, it becomes clear that the system’s revenues and bond holdings will not be sufficient to see us through the baby boom bulge, we can increase the payroll tax again. Current insolvency predictions give us time. In the meantime, the moratorium on the Social Security Trust Fund payroll tax surcharge should be restored.
In the late 1990s, Sara Dustin was Vice President of Earl Bourdeon’s organization, The New Hampshire Association of the Elderly.
Image Credit: Detroit Free Press