The looming battle of the budget
President Obama has won a great victory in Congress and 160 million Americans, the employed and the unemployed, will benefit. The Republican Speaker of the House, John Boehner, was forced to accept the two month extension of payroll tax cuts and unemployment benefits that had passed in the Senate by a bipartisan vote of 89 to 10.
Boehner seemed not to understand that Republicans were in a politically awkward position. Last fall they fought vigorously for an extension of the Bush tax cuts that were due to expire at the end of 2010. Obama wanted to continue tax cuts except for millionaires and billionaires, but Republicans characterized the exclusion of the wealthy as class warfare.
That was then. This year it is a different story. Payroll tax cuts apply only to those who earn $106,800 per year or less. The rich do not benefit, so Republicans lost interest. They focused their attention on the destructive consequences of cutting taxes when the nation is also trying to reduce the deficit. However, that was not an issue of sufficient urgency to derail approval of the Bush tax cut extension last year.
After the existing payroll tax cuts expire on Dec. 31, Congress will have only two months to develop a strategy to stimulate economic growth while cutting costs.
In a cynical gesture, Republicans in the House refused to consider the Senate bill because, they say, the period of time is too short. They went from not wanting the bill at all to rejecting it because it was not long enough. The absurdity of this position forced the House Republicans to relent.
However, this is no occasion for working and middle class Americans to gloat over their victory. As soon as the holidays are over Congress will be back in session to decide on a resolution of the payroll tax cut issue, but the debate will involve many other matters. At the root of the problem is how to pay for the total federal budget.
The estimated cost of the payroll tax break for one year is $112 billion. Obama supports that plan because it both helps Americans with a lower income and also boosts growth in the economy because working people will tend to spend the extra pay. It is important for voters to understand how the tax break works so that they can be politically active in the debate.
There is a FICA (Federal Insurance Contribution Act) deduction on every paycheck. The normal deduction is 6.2 percent of the salary amount as payment for Social Security. With a tax cut of 2 percent, the deduction is reduced to 4.2 percent. That amounts to about a $1,000 per year pay increase for those earning $50,000 or so.
Cuts in payments to the trust fund that manages the Social Security system could create greater financial difficulties for that program. Therefore, there should be payments from the general fund to the trust fund managing the Social Security system to offset the tax cuts. Arguments that payroll tax cuts damage Social Security would then have little merit.
The Bush tax cuts that cost $4 trillion per year are also due to expire at the end of 2012, so there will be a number of issues involved in the debate. Every American has a duty to be well informed and involved.
