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Paying For The Payroll Tax Cut

09 Dec 2011
Posted by Pete Davis

Late next week, Congress will extend the present law 2% payroll tax cut for another year. This is a good way to sustain our fragile economic recovery. The additional take home pay each pay period is more likely to be spent than a lump sum would. How it's paid for matters too. Rather than borrowing another $120 billion from China and $35 billion to extend unemployment insurance and $38.9 billion to avoid slashing the Medicare physician reimbursement rate by 27%, several items previously agreed to, but never proposed by the Super Committee, will almost pay for them over the next decade. This afternoon, the Congressional Budget Office scored the House Republican version of the payroll tax cut, H.R.3630. It's $25.2 billion short of balance FY12-FY21. It starts out with a deficit increase of $166.8 billion in FY12, $71.6 billion in FY13, and $9.3 billion FY14, a total of $247.7 billion (assuming it's not extended late next year), before reducing the deficit by $222.5 billion over the rest of the decade.

The pay fors in order of size are: Medicare spending cuts, $38.4 billion; increased federal employee retirement contributions, $36.7 billion; increased Fannie Mae and Freddie Mac mortgage insurance rates, $35.7 billion; other health care offsets, such as cuts in the PPACA prevention fund, $33.4 billion; FCC spectrum auction, $16.5 billion; and other, $36.6 billion.

Aside from the recession driving down revenues and raising unemployment insurance and other federal benefits, rising health care costs, mostly in Medicare and Medicaid, have been the largest drivers of our rising deficit, so it makes sense to look there for spending cuts and revenue increases.  Federal employees will pay more for their pensions. I don't know how generous those pensions are projected to be in comparison to contributions. Anybody? Certainly, under-priced Fannie Mae and Freddie Mac mortgage insurance was a big contributor to the real estate bubble that preceded our recession, so this pay for makes a lot of sense. Health care spending will be a battleground for a long time. How much cost savings would have resulted from the PPACA prevention fund?  I don't know, so this one depends on how effective or ineffective that spending would have been. We probably will never know. I don't object to assuming some revenue from FCC spectrum auction, but I would note that past FCC spectrum auctions have failed to deliver projected revenues.

The Senate Democratic payroll tax cut, S.1944, would expand the current 2% cut to 3.1% and would pay for it with a 10-year 1.9% surtax on incomes over $1 million. CBO scored this as balanced. It doesn't include the unemployment insurance extension or the "doc fix" or the alternative minimum tax relief in the House Republican bill. While I am concerned about the burgeoning income disparities in this country, I would rather set income tax rates as part of a broad reform we desperately need and not as an ad-hoc increase on millionaires to pay for a one-time tax cut.

I expect the final version of this bill to look similar to H.R.3630. If President Obama signs it before Christmas, employers will have to scramble to implement it in time for the first paychecks of the new year. Washington's last-minute-itis strikes again.

Federal pensions

Pete asks: "I don't know how generous those pensions are projected to be in comparison to contributions. Anybody? "

I am a Federal employee and the question you asked doesn't make sense. Our pensions should not be judged independently from our salaries. Compared to many other employers we pay a relatively small percentage of salary towards our pensions. But on average, for the same education, skills, and experience our salaries are lower than those payed in the non-Federal sector and this low personal contribution to pensions was planned as alternative compensation. I think these discussion of Federal pay should always use total compensation and not break off different pieces of the federal employee system.

So the House proposal to increase our contribution to pensions is effectively a substantial pay cut added on top of the ongoing pay freeze.

I am a cancer researcher and it took me 11 years of university training and an additional 5 years of post-doctoral training to qualify for my entry level job. I get payed about 25% less then if I moved to a university and did my research at the university. And crazily, I would still being using Federal money to do the same sort of research. I stay because I have more freedom to pursue my research then if I had to fit into the university system.

[NB: For employees hired since 1985 Federal pensions are 1%/year served of the average of the three highest years of salary. So you if you retire after age 62 with 30 years service making $100K/year for the last three years you have earned a pension of $30K per year which adjusts with inflation. We also pay Social Security/Medicare and get those benefits and we have access to a 401K equivalent that has a maximum match of 5% of salary and very limited investment options.]

Federal Pensions

Unlike social security/medicare, federal pensions did not provide cash for wars on credit and tax cuts for the rich.

OPM pension fund "balance" is over $800B, mostly non cash contributions from each years' US budget.

Actually cash from employee "contributions" is hard to see but runs about 3%.

Military retirement and TRICARE for life funds have fund "balance" of $400B no employee money ever went into this.

Federal pension beneifts are phenomenal, and the funds do not need to worry about the managers losing the money on the gambling tables in Manhattan.

But each year the disbursements demand cash!!

This sounds bad

Maybe the compromise will be more like the House version, but I'm tired of "budget wonks" not acknowledging the truth--lots and lots of the American people, including Tea Partiers, are tired of Medicare cuts. I think the surtax is the perfect way to pay for the break. If this doesn't happen, and we keep going to the Medicare well, we're going to reach a point where the American people are going to get angry when the Medicare cuts really bite. At that point, the defenders of the program--which the Republican Party is billing itself as in more than one way--are going to have some very difficult choices if they want to stay in office. And trust me, waiting for "tax reform"--like waiting for a magical fairy to appear--is not going to be in the mix whatsoever.

IOW - The CBO scored both

IOW - The CBO scored both plans as increasing the deficits before the "manana bean" works its compounding magic and "reduces deficits" (while simultaneously increasing growth, reducing baldness, and making tea in the morning). But wait - for a limited time only -- if we double the payroll tax deduction, we can get twice the deficit savings in year 15! All for a low low price of -- nothing. Yes it's all free folks!!

IOWIOW -- deficits will increase ---- period.

It is long past time that

It is long past time that payroll taxes stopped hiding deficts.

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