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Don’t Fall Into Democrats’ Payroll Tax Trap

As the original 2% payroll tax cut for employees is set to expire next month, Democrats are proposing an even bigger cut.  Earlier this week, they introduced legislation (S.1917) to cut the payroll tax to 3.1 percent for employees, and for employers on the first $5 million of their payroll.  The bill would also eliminate the payroll tax paid by employers for the last quarter of 2011 and all of 2012 on the first $50 million of a company’s increased annual wage costs.  In order to pay for it, they are proposing a “surtax on millionaires,” which applies a 3.25 percent tax on modified adjusted gross income over $1 million, or $500,000 for a married individual filing separately.

Even though this cut will discard 38% of the annual revenue for Social Security, Democrats are accusing opponents of supporting a tax increase on “working families.”  For their part, most Republicans have only voiced opposition to the tax hikes, but shied away from assailing the very premise of a temporary payroll tax cut extension.  In fact, Senator McConnell told reporters yesterday, “In all likelihood, we will agree to continue the current payroll tax relief for another year, but we believe it should be paid for.”  He has yet to divulge how they would pay for it.  Kudos to Senator Jon Kyl for uprooting the entire premise behind Democrats’ rationale by noting that this cut has not been pro-growth and it has only further endangered the future of Social Security.

Republicans must show how it is the Democrats who are treating Social Security like a Ponzi scheme by indiscriminately marauding it, while paying out the shortfall with deficit spending, in addition to tax hikes.  Payroll taxes supposedly singlehandedly fund Social Security, yet Obama and the Democrats plan to cut 38% of its revenue source with this bill, even though SS already faces a $50 billion shortfall.

Republicans should force Democrats to answer the following questions:

1)      If temporary payroll tax cuts are so stimulative, how do you explain its failure to create jobs in 2011?  Why will 2012 be different?

2)      If allowing the payroll tax cut to expire will engender a “downright scary” impact on the larger economy, as Harry Reid has suggested, then how scary will it be when the Bush tax cuts expire?

3)      If we can forego the revenue to Social Security for two years, how much longer will we continue extending the payroll tax without regard to Social Security?  Why not extend it indefinitely, which will, at least, provide some pro-growth stimulus.  Why not eliminate it completely?

4)      Last year, the payroll tax reduction necessitated $105.4 billion in general revenue transfers to Social Security, while this year’s plan will require an additional $265 billion.  Does that reflect the accounting of a pay-as-you-go system or a Ponzi scheme?

5)      Why not repeal the Medicare payroll tax?  Isn’t that also a burden on “the working class?”  We’ll just borrow more money or tax the rich to pay for Medicare benefits.  Also, the 18.4 cent federal gasoline tax is another regressive tax on the “working class.”  Why not cut that tax for a year or two?  What will happen to the Highway Trust Fund?  We’ll just enact permanent tax increases on the rich to pay for this temporary cut.

6)      Should the rich be responsible to pay for everyone else’s Social Security?  If so, why should anybody but the rich ever have to pay taxes that are earmarked for specific services?  And if the rich should pay for current SS, why not divert the funds to private retirement accounts instead of the vapid SS Trust Fund?  Why is this scheme less objectionable to the left than private accounts?

This is our opportunity to not only oppose tax increases, but to use their own arguments to push entitlement reform.  It’s an opportunity to call out Obama for his duplicity on Social Security by showing how he refuses to allow us to keep our payroll taxes in secure personal accounts, but has no qualms about eliminating them altogether.

While extending the payroll tax cut sounds appealing even to many conservatives, such a move would necessitate tax increases or more deficit spending.  Republicans say they will pay for it with spending offsets; however, that would require at least $115 billion in additional cuts for 2012 (not just over 10 years), a proposition that Democrats would never support.  Hence, once we cede the premise that the Social Security tax cut must be extended, we lose all leverage to push for spending cuts.  Instead, Republicans will fight the tax increases and settle for a deal that simply increases deficit spending.

Let’s go on offense instead of being cornered into supporting the wrong tax cut for the wrong reason.

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