NCPA - National Center for Policy Analysis

The Dark Side of the Payroll Tax Cut

March 12, 2012

As a means of stimulus to the economy, President Obama and Congress agreed in December 2010 to a 2 percent cut to the Social Security payroll tax for 2011.  This cut -- from 12.4 percent to 10.4 percent -- has since been extended through 2012, says Charles Blahous, a research fellow with the Hoover Institution.

The cut was somewhat controversial, but the truly unprecedented and groundbreaking component of the Left's move here was the means by which they chose to fund the resulting shortfall in the Social Security Trust Fund.  They elected to transfer more than $215 billion in general tax revenues (income taxes) to make up for the loss.  This decision undermines a number of precedents for the program.

  • It further undermines the already-tenuous principle that retirees would be receiving benefits that they themselves had paid for.
  • It eliminates the time-honored principle of relative parity between Social Security tax revenues and program outlays -- a feature that was crucial in its original passage.
  • It encourages greater redistribution by commandeering a program that was meant to tax all workers at an equal rate and funding it through taxes that are progressively imposed.
  • It contributed to general government debt while obscuring the role that Social Security plays in driving debt accumulation.

The move, therefore, while theoretically stimulating the economy, is but the latest attempt by the left-of-center policymakers who sought to create a greater redistribution of wealth.  The policy change substantially alters the Social Security program and removes those features of the system that were so fundamental in its original creation.

Finally, grave concern should exist regarding the precedent set by this move.  Now that income tax revenues have been siphoned off to fund the mushrooming requirements of a Social Security program that can no longer pay for itself, it will likely become easier to do this again in the future.

Source: Charles Blahous, "The Dark Side of the Payroll Tax Cut," Defining Ideas, February 24, 2012.

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