An earlier version of this post contained a rant by me based likely on my confusion between per paycheck versus per week. I have since edited that part out and updated the post in light of the fact that a deal was passed.
The regular so-called "payroll tax" for individuals used to be 6.2%. It was temporarily reduced by two points to 4.2%. The question facing the congress and the President was whether to extend the lower tax rate for two more months (as the President and the Democrats wanted) or one more year (as the Republicans wanted).
I was and still am against both, but more on that later.
If the 6.2% tax rate is applied to an annual amount of $50,000, your tax is $3,100. If the 4.2% tax rate is applied to $50,000, your tax is $2,100. The difference is $1,000 which amounts to about nineteen dollars and twenty-three cents per week.
However, Mr. President and the Democrats wanted this reduced tax rate to be extended only for two more months. There are eight weeks in two months. Now that the Republicans agreed to this means that Mr. President and his Democrats reduced your payroll tax by a measly one hundred and fifty-three dollars and 85 cents. If the Republican plan had been accepted, the reduced rate would have been in effect for not just 8 weeks but for 52 weeks. You'd indeed have paid $1,000 less in payroll taxes in 2012.
A one year extension is less bad also because it means smaller adjustment cost than a two year one.
Why am I against these so-called "tax-cuts"?
Imagine you need to make a $1,200 purchase at the end of the year. To that end, you decide you're going to put aside $100 every month, starting in January. You buy an extra hardcover book to read on the beach every month for the summer, so you save only $80/month in June, July and August. If you don't change anything else, you'll end up with $1,140 at the end of the year, and will be short of the $1,200 you needed to make the purchase. You can make up for the shortfall by saving $115 in September through December. You consume more today, you consume less tomorrow.
Social Security is similar to that. The government has made promises to many people that they will get a certain amount every month for the rest of their lives. This promise is funded by taking the money from today's workers and giving it to today's old. That's the payroll tax. That's what pays Social Security benefits. Those benefits have already been promised to today's old and we know roughly what amount is needed to cover those promises. If today's workers pay less in payroll tax than today's old get in Social Security, the government must either make that up with increased taxation tomorrow or by printing money tomorrow.
Besides, the requisite change to make the extension effective for an extra period would be just one line. The actual bill that was passed took 14 pages and it contains such gems as:
(g) RECAPTURE OF EXCESS BENEFIT.— (1) IN GENERAL.—There is hereby imposed on the income of every individual a tax equal to 2 percent of the sum of wages (within the meaning of section 3121(a)(1) of the Internal Revenue Code of 1986) and compensation (to which section 3201(a) of such Code applies) received during the period beginning January 1, 2012, and ending February 29, 2012, to the extent the amount of such sum exceeds $18,350.
I have no idea what that really means but I think it means anyone who makes over $18,350 during January and February will have to pay an additional 2% in tax (clarifications and explanations welcome). If so, there is no reason to expect this extension to have any stimulating effect at all, even in the form of moving future consumption to the present, because anyone who has the ability to change the timing of their income to avoid the extra two percentage points of tax will do so.
Social security has been in need of real reform for at least two decades. Let's not allow politicians to defund it. Let's not allow politicians to create extra borrowing requirements for the near future.
Let's have a real conversation about how to reform Social Security instead.