Saturday, December 31, 2011

Political wisdom, fiscal malpractice

Political wisdom, fiscal malpractice. That would be my description for the much ballyhooed "payroll tax cut" supported by a bipartisan chorus of political leaders. The cut is good politics — and fiscal malpractice.

Let's begin with some basic facts on the payroll "tax" situation:

Most of us with 401K or similar retirement plans invest between 3% to 6% and employers match some portion of this contribution. That's basically how Social Security is also structured: the employee and employer contribute to the fund.

The previous and supposedly standard payroll deduction for Social Security is 6.2% of your first $110,100 of income. With the "temporary" reduction, workers are contributing only 4.2% of that income to Social Security. If you are self-employed, you normally pay 12.4% to Social Security, but with the "reduction" you are paying "only" 10.4% (the employer's 6.2% plus the employee's 4.2% rates).

The so-called "$40 extra" that President Obama has been touting is really about $19 per week if, and only if, you earn $50,000 a year. If you earn $30,000 a year, you're looking to save $11.54 per week — $600 annually. That $600 for a worker is already gone thanks to an average $4,130 extra per year in food and energy costs. With other local and state tax increases, the middle class will still be losing ground in 2012.

The cost of this gimmicky fix? For 2011, the estimate is that a $140 billion hole was created in the federal budget. Yes, the law authorizing the deduction rate change mandates that Congress fill the hole with other revenues… but what other revenues would those be? The proposal to increase mortgage insurance fees on loans through Fannie and Freddie will only offset the lost revenue by $20 to $30 billion. If the 2012 tax holiday is extended, another $140 billion will be added to the black hole. Filling $280 billion with $20 billion? That won't work, so other taxes will have to rise.

Raising taxes on "the rich" isn't going to cover the massive black hole being created. I've posted previously that federal debt is now greater than annual GDP. You can't take everything from everyone to pay off this mess.

This payroll deduction holiday is bunk.

It is fiscal malpractice to play with Social Security. If anything, the payroll deduction for Social Security should have been maintained at 6.2% and the ceiling raised to the first $450,000 of income. We should be restoring fiscal sanity to the federal budget, not starving the Social Security fund.

Granted, I don't like Social Security in its current form and would rather see major tax and benefit reforms. Still, I don't see how cutting funding is a good thing long term. "Temporary" cuts have a way of becoming permanent.

To make matters worse, the politicians want to implement "fixes" to both the alternative minimum tax (AMT) and Medicare physician compensation schedule (the annual "Doc fix" comedy) as part of the Social Security deduction holiday. How these issues relate is something I can't answer. I suppose if you want to create a hole in the federal budget, you might as well create a super massive black hole.

The doc fix costs more each year. Over the next two years, and the doc fix will be implemented for those two years, the cost is $38 billion.

Talk about gimmicks! The budget assumes Medicare will cut payments to doctors "next year" and every time "next year" arrives, the cuts are deferred. If the cumulative cuts to physicians dating back to 1997 were permitted to take affect, doctors could see Medicare payments cut by half. For some doctors, that's not a problem: they don't take Medicare patients.

We will get the payroll "tax cut" for at least another year… and probably for years to come. We'll also get the AMT and Doc fix changes. By the time February ends, I fear we'll be adding $2 trillion to the debt over the next decade. This from a president who once vowed to cut the federal debt in half.
Doesn't that "payroll tax cut" sound wonderful now?

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