Social Security Payroll Tax Cuts = Poor Economics, Poor Policy, and Poor Politics

The 2 percentage point payroll tax “holiday” for employees that was enacted last year is scheduled to expire at the end of December 2011. President Obama reportedly plans to ask Congress to renew it and to provide a similar tax cut to employers. It was unwise last year to substitute the employee tax cut for the expiring Making Work Pay Tax Credit. Extending this policy by reducing the employer Social Security contribution is even worse.

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Social Security Tax Cuts Are Poor Economics

  • Corporations are already sitting on substantial cash reserves; an employer payroll tax cut will increase these cash holdings without any guarantee of additional hiring. Corporations were sitting on $1.9 trillion in liquid assets during the first quarter of 2011 (the most current data), the largest such sum ever recorded.  Moreover, they made a record $3.8 trillion in profits in the second quarter of 2011. Most companies are not using their cash to hire new employees now. A tax cut will just fatten their bottom line.  Even if an effort was made to target the employer payroll tax “holiday” to employers hiring new employees, it is likely that much of it would be given to employers who would be hiring without this tax break.
  • Companies are not hiring because consumers are not buying. Consumers, many of whom have lost income and assets since 2008, do not have enough money to purchase what companies are capable of producing. No matter how big the tax breaks, companies are unlikely to hire until more people buy. Workers need work; corporations do not need another tax break. As the bipartisan Tax Policy Center recently noted: “This also promises to be a boondoggle. We don’t know what the tax cut would be, but let’s say it would reduce the employer share by half, or about 3 percent. That comes out to an average tax cut of about $1,200 for each new employee. Would a company hire a new worker for, say, $38,800 instead of $40,000? Most wouldn’t. At this point in the business cycle, firms hire when they need workers to fill orders, not to get a relatively small tax break.
  • There are much better ways to stimulate the economy than a payroll tax cut. Economist Dean Baker has commented that the argument that an employer payroll tax cut will lead to significant hiring “does not pass the laugh test.” According to Moody’s Analytics, an employer payroll tax cut generates $1.24 in economic activity for every dollar spent, which is much lower than other spending measures. For example, extending unemployment insurance benefits generates $1.61 for every dollar spent, a temporary increase in food stamps creates $1.74 in economic activity, and providing general aid to struggling state governments generates $1.41.
  • Politicians should not give another tax break to huge and profitable companies that are paying no taxes already and in some cases shipping jobs overseas. A recent study of 12 of America’s biggest companies – including Exxon Mobil, FedEx, General Electric, IBM, Verizon, and Wells Fargo – found that they raked in $171 billion in profits from 2008-2010, got huge tax subsidies and had a negative tax rate. 
  • Even if a tax cut is the only incentive that can be approved by Congress, there is no reason to tie it to Social Security.Employers would receive the same boost from a refundable tax credit paid from the general fund as they will get from a payroll tax cut. And Social Security benefits will not be put at risk by diverting payroll taxes from the Social Security Trust Fund.
  • It’s easy to enact tax cuts – it’s very hard to end them. Most Republicans have signed a pledge to oppose any tax increases. Any lawmaker not voting to renew the current employee payroll tax cut will be charged with supporting a nearly 50 percent payroll tax increase for average Americans by restoring employee contributions to where they were before the “holiday” – 6.2 percent rather than the current 4.2 percent. Let’s not divert even more of Social Security’s dedicated revenue by enacting a second Social Security tax cut.

Social Security Tax Cuts are Poor Retirement Income Policy

  • Social Security is secure because it has its own dedicated revenue. The employer payroll tax cut would substantially reduce that dedicated revenue and substitute general revenue borrowed from the public.
  • Traditional private pensions are disappearing and 401(k) and other private retirement accounts are subject to the vagaries of the stock market and other insecurities. The one stable piece of Americans’ retirement security should not be weakened by a payroll tax cut that is unlikely to result in job growth.
  • In addition to retirement income, Social Security provides vital protection against the loss of wages in the event of disability and death. These vital protections, often workers’ only protection against these tragedies, should not be weakened.

Social Security Tax Cuts Are Poor Politics

  • Wall Street banks and other profitable corporations do not need another tax break, and certainly not one that weakens Social Security. Corporations should not be let off the hook from paying their fair share to Social Security when many are already flush with cash. This proposal does not even include a requirement that the companies getting the tax break hire any new employees.
  • The public already believes politicians are raiding Social Security, and the payroll tax cut will reinforce that perception. Unlike the government’s general revenue, Social Security contributions, by law, must be used solely for the purpose of Social Security. Reducing its dedicated contributions for the purpose of stimulating the economy is inconsistent with the dedicated nature of the funds, especially when the stimulus could be done more effectively without affecting Social Security.
  • The payroll tax cut will further undermine the American people’s confidence in Social Security. Americans understand that Social Security is facing a shortfall. They need to be reassured that Social Security will be there when they need it; chipping away at the program will further undermine their confidence.

View the full text of the petition here