President Obama and his supporters are pushing hard on a proposal to reduce the payroll (FICA) tax on Social Security from the present two percent cut to a cut of 3.1 percent. The two percent cut, which expires on January 1, 2012, is touted as putting $1,000 into the pockets of a household warning $50,000 in wages and will increase to $1,500 with the deeper proposed cut. Failure to enact the Obama proposal is being advertised as a tax increase. There are problems with this approach, both currently visible and potential in nature.
The two percent FICA cut for one year is estimated to cost the Social Security trust fund $112 billion, meaning that each one percent cut should have reduced revenue by $56 billion; therefore, the 3.1 percent cut will reduce revenue by $175 billion from the employees’ share alone. Since Obama wants also to reduce the employers’ share by 3.1 percent, this will mean another $175 billion loss in revenue. Over the two-year life of these cuts, the revenue loss will be about $400 billion.
President Obama and the Democratic legislative leadership propose to pay for the FICA cut with a tax surcharge on those earning a million dollars or more. Republican senators switched from opposition to support only two days ago; however, the Republicans are opposed to the tax surcharge and have proposed instead a five-year freeze on the pay of federal employees, reducing the federal government workforce by two hundred thousand, and, crazy as it seems, means test millionaires on entitlement to unemployment benefits and food stamps. The GOP-controlled House has not even put the FICA tax cut on the table for a vote.
It would appear that to get the 3.1 percent tax cut approved, the payment for it will either need to come out of the hides of others, or the needed money will be borrowed. What the cuts do is break the link between the FICA tax and the Social Security trust fund, and allocate more of Social Security funding to general revenue. It will thus embolden those who want to eliminate Social Security to whittle away the prime source of funding by reducing the FICA tax rate.
It would appear that unemployment will be high and the economy not making much headway as we approach the end of 2012. Logic dictates that Obama would call for another extension of FICA tax cuts and lowered FICA tax rates could become permanent. Since President Obama would almost certainly want another extension of unemployment benefits, the bargain he might be forced into would be permanent extension of the Bush tax cuts.
Switching to a broader discussion of the Obama jobs package unveiled in September 2011, the forecasting firm of Macroeconomic Advisers estimates the package will add 1.3 million payroll jobs by year-end 2012 and that effect would be only temporary if Congress does not renew the program; therefore, the jobs program will not make much of a dent in the current totals of 14 million unemployed and an additional 11 million under-employed.
The economist Robert J.Samuelson calls Obama’s original stimulus plan only a partial success, because it failed in its main mission: triggering a strong, self-sustaining economic recovery.
The best long-term insight into President Obama’s vision for the future is provided by his 12-year plan. His plan would raise $1 trillion in revenue by eliminating tax benefits for the wealthiest Americans. The plan would cut spending by $2 trillion, with $400 billion coming from the military budget and the rest from domestic non-military spending.
Obama’s 12-year vision is clouded by the fact that the revenue increase of $1 trillion and the spending cuts of $2 trillion do not add up to the $4 trillion he wants to cut from the deficit, unless he sees a trillion-dollar cut in the vague category called waste and fraud.
Further clouding the vision is that Obama proposes a six-year, $560 billion investment in infrastructure rebuilding, which would eat up over half of the tax increase.
According to economists at the Center for American Progress, President Obama has already been able to enact $850 billion in tax cuts, and if he were to get approval for all the tax cuts contained in his present jobs package, there would be an overall $1.1 trillion in tax cuts in his four-year term. How does he propose to achieve an overall increase of $1 trillion in revenue over 12 years if he already is in nearly a trillion-dollar revenue hole?
What would it profit us to renominate a president who has vacillated so much in fundamental policy and has such an uncertain idea of where he wants to take the nation?