The title of this post is purposefully a bit misleading. Something along the lines of “Is Working Hard To Defund” would be more accurate, but much less clickable. We will all know the result before much longer.
The current president is strongly and publicly supporting cutting the funding mechanism for both Social Security and Medicare. He is reported to be threatening a veto unless it is included as part of the pending COVID-19 relief stimulus package.
With “Biden wants to defund the police” being a popular rallying cry lately, let’s talk about defunding many millions of American people.
What Are Payroll Taxes?
Payroll taxes are deducted from an employee’s wages. Employers match that deducted total.
Employee wages up to $137,700 (in 2020) are subject to a 7.65% tax. Both the employee and the employer pay that 7.65% amount. Salary amounts over $137,700 are not subject to payroll tax for either the employee or the employer.
Self-employed individuals pay the entire 15.3% payroll tax.
An “Additional Medicare Tax” exists for individuals earning over $200,000 and people filing jointly over $250,000. It was instituted to help defray additional expenses of the Affordable Care Act. That amount is 0.9% of earnings over the trigger earnings amount until the end of the year. It’s collected every pay period after income exceeded the trigger. There is no company matching requirement for the additional tax. Self-employed people are also required to pay.
So, cutting payroll taxes would reduce the tax burden for both employees and employers. Who could possibly object to that?
What Do Payroll Taxes Pay For?
Most of the payroll tax amount, 12.4% of the total contribution, goes into the Social Security Trust fund.
The balance, 2.9% of the total contribution and any “Additional Medicare Tax” mentioned above, goes into the Medicare fund.
Payroll tax revenue accounted for $1.243 Trillion of federal revenue last year.
Of that, $914 Billion went to the Old Age, Survivors, and Disability Insurance (OASDI) funding. OASDI is Social Security for all intents and purposes. Another $278 Billion went to the Hospital Insurance Trust Fund, Medicare for the purposes of this post.
What Are The Advantages of Another Tax Cut?
More take-home pay is always good, especially during trying financial times. The net impact on the national economy would be at least partially dependent on the amount of the cut. We have not been able to find any concrete discussion of what the proposed amounts are.
Relieving employers of the burden of paying the matching funds would help conserve revenue which may be weakened as they recover from the effects of the global pandemic.
It should be noted as part of an existing pandemic relief action, many employers are already not expected to pay the payroll tax amounts due until the end of the year.
What Are The Disadvantages of Another Tax Cut?
Any discussion of tax cuts must be prefaced with at least a mention of the large, permanent corporate tax cuts initiated by the current administration and a Republican Congress. Tax revenue fell sharply because of these cuts, while the much ballyhooed expansion of the GDP has not materialized to take up the slack.
So, deficit spending continues unabated. Any further reduction of revenue will continue to shake the unstable economic platform.
The Social Security Administration calculates the OASDI Trust Fund will be depleted by 2036. The Wharton School has examined the impact of the pandemic on the economy and figures that depletion could easily come four years sooner if the country recovers as expected, two years sooner if it recovers quickly.
That’s not many years down the road for an important source of income for millions of retiring Americans. Any reduction of the revenue replenishing the Social Security Trust Fund will shift the depletion date closer to today.
Reducing the revenue for Medicare while expecting services to remain available will necessitate an increase in Medicare premiums.
Cutting “Entitlements” is a Long Sought Republican Goal
Comparing the pie chart above with the pie chart to the right shows where income is coming from and where it’s being spent. The major split in spending is between discretionary and non-discretionary spending, much of which is a subject for debate.
It’s obvious that individual income taxes and payroll taxes comprise the bulk of the revenue for the United States. It’s also clear the slice of the pie for corporate income taxes is a shrinking piece of a pie that expected to continue to feed the same programs.
Because of the growing discrepancy between income and spending, something will have to offer relief. For the time being, the debt of the country is expanding rapidly.
If you’ve been listening, you’ve heard Republicans chipping away at the national dialogue while shaking their heads and lamenting “We just can’t afford Social Security and Medicare any more!”
The worst part of singing that song continuously is they’re working the back doors to ensure the hole dug from spending more than we make is so deep something dramatic must take place.
THIS payroll tax cut will grease the skids for that plan.
Some Solid Writing to Read
Trump’s Second-Term Plan For Social Security: Starve The Beast is a prescient piece in Forbes from Teresa Ghilarducci written a year ago. I bumped into it while Googling some research.
It’s worth a read in it’s entirety because it perfectly drives home the point of what is actually happening with this push to cut payroll taxes while millions of people remain unemployed. In it, she notes the following:
“Starve the beast” is a political two-step that first generates deficits through tax cuts and, second, points to the alarmingly high deficits to attack government spending and reduce entitlements. Credited to an unnamed Reagan administration official in 1985 and long associated with Reagan economic guru David Stockman, the notion of “starve the beast” emerged from around the time of Reagan’s 1981 tax cuts, which were not paired with simultaneous spending reductions.
Tying a Tax Cut to a Stimulus Package is Wrong Now
Some Republicans are reported to be objecting to adding a payroll tax cut to a stimulus package being negotiated in Congress. Whether that’s true or not, or if those reported Republicans have the stomach to buck the vindictive president remains to be seen.
Millions of Americans will be left out of a payroll tax cut as they remain unemployed. There are arguments being made that a tax cut would be an incentive for people to return to work rather than continue luxuriating in their vacation on unemployment insurance. That’s such a tone deaf remark that shows the disconnect between American people who want nothing more than to head back to work, perhaps moreso now that the additional federal unemployment money is disappearing.
More tax cuts won’t fix what the earlier tax cuts didn’t.
Stay safe and healthy and wear your masks.
GOP coronavirus bill likely to include payroll tax cut and tie school money to reopening plans – Washington Post
The Impact of the Coronavirus Pandemic on Social Security’s Finances – Wharton School of the University of Pennsylvania
The Federal Budget in 2019 – US Congressional Budget Office
Trump’s Second-Term Plan For Social Security: Starve The Beast – Forbes
