Paying for the "payroll tax" cut

[veremchuka]

As we know this is not really a "payroll" tax cut as it is a cut in the FICA tax rate. So with all the talk about how SS will be insolvent in X years how can these morons justify taking away from SS? Well they are morons so I guess that is as good a reason as any but that's not what I want to know.

I heard something about taxing home owners to pay for this. Does anyone have a link to explain what that entails? Will this be a tax on new mortgages, that'd really help the housing industry. Or is it a yearly tax if you have a mortgage? Or is it a tax on your house even if your mortgage has been paid off?

 

[LOL!]

In the long run, it will be easy to raise the maximum amount that is subjected to this tax. It was $106,800 in 2011 and will be $110,100 in 2012. There is really no reason why the limit can't be changed to $150,000 or even unlimited.

To make things more progressive, they could make this tax progressive as well.

 

[Lazarus]

Does the payroll tax cut reduce the amount of Social Security that we will collect? I have not been able to find any info?

 

[MichaelB]

Does the payroll tax cut reduce the amount of Social Security that we will collect? I have not been able to find any info?

Your social security pension is calculated based on your eligible earnings, so these reductions should not affect it.

 

[tightasadrum]

I heard something about taxing home owners to pay for this. Does anyone have a link to explain what that entails? Will this be a tax on new mortgages, that'd really help the housing industry. Or is it a yearly tax if you have a mortgage? Or is it a tax on your house even if your mortgage has been paid off?

what I read was that a slight fee increase would be charged on every NEW government backed loan, ie Freddie & Fannie, but that it wasn't fully decided yet. It's hard to believe that such a fee could cover the whole tax reduction though.

 

[pb4uski]

In the long run, it will be easy to raise the maximum amount that is subjected to this tax. It was $106,800 in 2011 and will be $110,100 in 2012. There is really no reason why the limit can't be changed to $150,000 or even unlimited.

To make things more progressive, they could make this tax progressive as well.

+1 the mystery to me is why they haven't just made the change. I don't think that anyone earning $106,800 to $150,000 would be upset, particularly if they know that their SS will be more secure as a result.

 

[donheff]

Think of this as a tax refund from the general revenue or any other unfunded tax cut. They collect less money through the payroll tax (thus Payroll Tax Holiday) but they make up the difference to the SS Trust Fund by issuing an obligation from general revenue. This is just like spending SS Trust Fund monies on wars or anything else we have done in the past. It is simply more deficit spending. No better or worse than continuing the temporary Bush Tax cuts last year.

 

[MichaelB]

Funding for the bill is an increase of 0.1% (one-tenth of 1 percentage point) in home loan guarantee fees charged to mortgage lenders by Fannie Mae, Freddie Mac and the Federal Housing Administration.

 

[tightasadrum]

Back when I was w*rking at MegaCorp I remember learning one year after a promotion the I would not have to pay the payroll tax in the months of November and December. I was amazed and pleased. But it truly would not have made any difference.

 

[pb4uski]

Funding for the bill is an increase of 0.1% (one-tenth of 1 percentage point) in home loan guarantee fees charged to mortgage lenders by Fannie Mae, Freddie Mac and the Federal Housing Administration.

that the lenders will pass onto borrowers in the form of either higher fees or higher interest rates, so certain homeowners will pay the bill.

 

[rescueme]

More of the same...

Steal from one program (SS) to throw bread to the masses...

 

[justplainbll]

The corker would be if and when those paying the most into FICA wind up having their FICA benefit scaled back through some sort of means testing.

 

[meierlde]

that the lenders will pass onto borrowers in the form of either higher fees or higher interest rates, so certain homeowners will pay the bill.

Actually only those who re-fi or buy will be affected, if you already have a mortgage, you are set.

 

[pb4uski]

Yes, I know. That is why I said certain homeowners.

 

[frayne]

I was under the impression there is no actual SS trust fund and all the payments come out of the general fund, same place income tax, social security tax and medicare tax go into.

Please correct me if I am wrong.

 

[samclem]

Funding for the bill is an increase of 0.1% (one-tenth of 1 percentage point) in home loan guarantee fees charged to mortgage lenders by Fannie Mae, Freddie Mac and the Federal Housing Administration.

I've read that other places, too, and haven't dug any deeper. Does that sound like it adds up? Reducing the payroll taxes by 2% on every working American can be offset by a .1% increase in the fees charged to the small percentage of folks who get a new mortgage? Maybe the time windows are different: 2 months of tax cuts paid for by 12 months of increased mortgage fees.

 

[REWahoo]

Maybe the time windows are different: 2 months of tax cuts paid for by 12 months of increased mortgage fees.

You don't give that bunch in DC enough credit. They are much more creative than a mere 12 months:

Even though the tax cut approved Friday extends for only two months, a small fee on loan amounts will be levied for a decade on all mortgages sold to housing finance giants Fannie Mae and Freddie Mac, which control about 60 percent of the nation’s mortgage market.

Mortgage fees paying for tax cut - Spokesman Mobile - Dec. 24, 2011

 

[donheff]

I was under the impression there is no actual SS trust fund and all the payments come out of the general fund, same place income tax, social security tax and medicare tax go into.

Please correct me if I am wrong.

We have had lots of threads that address this topic. There is a SS Trust Fund. SS was originally a pay-as-you-go proposition. The Payroll taxes were supposed to pay expenses. As the boomer retirements loomed and anticipated outlays grew Congress raised the Payroll Tax to generate a surplus intended to partially fund the boomer bump. That increase resulted in a huge surplus in the 90s in anticipation of the boomer retirements. However, as designed, the funds that entered the Trust Fund from our payroll taxes were loaned to the general fund to pay current obligations (i.e to support deficit spending). Those loans were backed by IOUs from the Treasury (not materially different than the IOU you would get if you bought Treasury bonds). None of this would have been a significant problem if we kept the deficit at a reasonable level. We failed to do that big time. The upshot is that we have a debt problem and will have a hard time meeting our obligations without a good deal of restructuring.

 

[LOL!]

Back when I was w*rking at MegaCorp I remember learning one year after a promotion the I would not have to pay the payroll tax in the months of November and December. I was amazed and pleased. But it truly would not have made any difference.

But don't go announcing that your take-home pay is bigger. My spouse told the story of a colleague who did that and everyone figured out their salary. It pissed off the folks who did the same job for less pay.

 

[misanman]

Even though the tax cut approved Friday extends for only two months, a small fee on loan amounts will be levied for a decade on all mortgages sold to housing finance giants Fannie Mae and Freddie Mac, which control about 60 percent of the nation’s mortgage market.

I'm not anxious to pay taxes in general but this is one tax I think I should be paying. I think SS should remain vital for the long term. Also, when they reduce FICA and replace the funding out of general revenues it makes it seem more like a welfare program.

I'm also amazed at the replacement funding - heard on the news that an affected mortgage holder would pay an additional $4,000 on a 25-year $250K mortgage - maybe someone can do the math to confirm. Doesn't seem to be a bargain to me when what we're getting is two months of FICA tax relief.

 

[JakeBrake]

I don't know if the current payroll tax cut controversy is exactly the same as DW's situation, but I suspect that it is.

DW is self-employed. We live in the region affected by Hurricane Katrina in 2005.
When I prepared our income taxes for 2005 using Turbotax, I was presented with the option of either paying self-emplyoment taxes for DW or not paying the tax since this was a special provision for self-employed people in the Hurricane Katrina region.

At the time it seemed like a no-brainer. The choice was to pay a few thousand in self-emplyment tax or to pay nothing. We chose to pay nothing.

Every thing was fine until DW received her annual SS statement in 2006. The statement showed her total earnings for 2005 as "0". Actually, 2005 was a good year for her business. The "0" went into her lifetime SS earnings record and possibly reduced her SS payout.

 

[Alan]

I don't know if the current payroll tax cut controversy is exactly the same as DW's situation, but I suspect that it is.

DW is self-employed. We live in the region affected by Hurricane Katrina in 2005.
When I prepared our income taxes for 2005 using Turbotax, I was presented with the option of either paying self-emplyoment taxes for DW or not paying the tax since this was a special provision for self-employed people in the Hurricane Katrina region.

At the time it seemed like a no-brainer. The choice was to pay a few thousand in self-emplyment tax or to pay nothing. We chose to pay nothing.

Every thing was fine until DW received her annual SS statement in 2006. The statement showed her total earnings for 2005 as "0". Actually, 2005 was a good year for her business. The "0" went into her lifetime SS earnings record and possibly reduced her SS payout.

It is not the same situation. If you look at your SS earnings for the years that the payroll tax reduction is in effect you will find that those earnings are not reduced at all as a result of the 2% cut, and the calculation on SS benefits is based on earnings, not how many actual $ a person has paid in.

 

[DoingHomework]

+1 the mystery to me is why they haven't just made the change. I don't think that anyone earning $106,800 to $150,000 would be upset, particularly if they know that their SS will be more secure as a result.

As someone in that range, no I wouldn't object.

But this whole business of the cut affecting SS is silly. We've had a unified federal budget for over 20 years. There is no separation of SS or any other payments/collections. They could just as easily eliminate SS collections from paychecks and increase the income tax. It's all a game.

 

[scrabbler1]

We have had lots of threads that address this topic. There is a SS Trust Fund. SS was originally a pay-as-you-go proposition. The Payroll taxes were supposed to pay expenses. As the boomer retirements loomed and anticipated outlays grew Congress raised the Payroll Tax to generate a surplus intended to partially fund the boomer bump. That increase resulted in a huge surplus in the 90s in anticipation of the boomer retirements. However, as designed, the funds that entered the Trust Fund from our payroll taxes were loaned to the general fund to pay current obligations (i.e to support deficit spending). Those loans were backed by IOUs from the Treasury (not materially different than the IOU you would get if you bought Treasury bonds). None of this would have been a significant problem if we kept the deficit at a reasonable level. We failed to do that big time. The upshot is that we have a debt problem and will have a hard time meeting our obligations without a good deal of restructuring.

While I basically agree with your post, what I highlighted in bold is not true.

The bonds in the SSTF are not like those held outside the US Government, such as those held by other countries, borkerage houses, and individual investors. They are nothing more than a bookkeeping entry which states how much one part of the USG owes another part. Their net economic value is zero because the asset value they are by the holder (SS) is equal to the liability value they are to the issuer (US Treasury). These special trust fund bonds cannot be resold on the open market.

I have a collection of quotes about the SSTF. Here are a few of my favorites:

• "Trust Fund balances are available to finance future benefits...but only in a bookkeeping sense...they do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes or borrowing." President Bill Clinton in his Analytical Perspectives section of the 2000 budget.
• "We have no positive assets in the Social Security Trust Fund." Secretary of the Treasury, and one of the trustees, Paul O'Neill, June 19, 2001, at a luncheon speech to the Coalition for American Financial Security in the Sky Room of the World Trade Center and later to Sam Donaldson on This Week, Sunday, June 25, 2001.
• "It holds no real assets. Consequently, it does not generate funds to pay future benefits. These so-called trust fund 'assets' simply reflect the accumulated sum of funds transferred from Social Security over the years to finance other government operations." June O'Neill, former Director of the Congressional Budget Office (CBO) at the CATO Institute's Conference for Women and Social Security.
• "Government trust funds do not correspond in any meaningful way to those in the private sector. Government trust funds are simply a form of earmarking, accounting mechanisms that record tax receipts, user fees, and other credits and associated expenditures," Barry Anderson of the Congressional Budget Office in testimony before the House Budget Committee, September, 2002.
• "We are going to get no help from the so-called Social Security Trust Fund. The Fund is a collection of non-negotiable government bonds in a filing cabinet in West Virginia. Investing in Treasury certificates is a good idea unless you are the Treasury. The idea that somehow this represents anything other than records kept on money collected by Social Security taxes that had been spent on other programs in the last 20 years is a complete fraud. When the president talks about using the Trust Fund to extend the life of the Social Security program for 24 years, he is wrong. We are misleading people into thinking that this Trust Fund has any relevance whatsoever. From an economic and a legal point of view, there is no Trust Fund." Former Senator Phil Gramm at the Economic Club of New York.
• "It is in this role as a savings account that the Trust Fund could fail. It cannot work because it holds no independent assets. Though the Trust Fund is backed by government securities, these have a different meaning than they would for you or me. If I hold a government bond, I have an asset that the government will give me money for or that I can sell at any time. If the government holds a bond, however, its obligation to give itself money is meaningless. The government cannot make these bonds good, as needed in 2014, except by borrowing, reducing other expenditures or taxing citizens." House Budget Committee Chairman Nick Smith 6-8-99
• "In fact, the money the government has supposedly been putting aside from the Baby Boomers' Social Security taxes is not there. The government has been borrowing the money to pay for the budget deficit. The Social Security Trust Fund is simply IOUs from the U.S. Treasury.... [Social Security] would be fine if the government would stop borrowing the money." Newt Gingrich 4-7-95
• "The truth is that the Social Security Trust Fund has already been stripped bare. There is no trust and no fund. It is a lot like the S&Ls. The savings and loans had a lot of real estate on the books, a lot of property, a lot of shopping centers, a lot of deposits, and everything else, until you looked inside and found out there was nothing there. The assets were mostly on paper.... Meanwhile, the Social Security cupboard is bare." Senator Ernest “Fritz” Hollings (D-SC) Congressional Record 4-24-91
• "When the money going out exceeds the money coming in, you are in trouble and that happens in 2016. Those who try to push the fatal date off to 2038 are counting the money that Social Security has in its so-called trust fund. However, the so-called trust fund exists only as a legal technicality, not as an economic reality...you cannot spend and save the same money." Thomas Sowell, The Washington Times, July 29, 2001.
• "It means that ordinary working Americans, like teachers, police officers and firefighters, who believe their payroll taxes are going toward their Social Security retirement are in for a surprise...Instead of going to the Social Security trust fund, their payroll contributions are being funneled directly into tax breaks for individuals and corporations" Robert Matsui (D-CA), Chairman House Ways & Means Subcommittee on Social Security, Associated Press, March 30, 2002.
• "Every dollar collected in (FICA) payroll taxes is spent the very minute, the very hour, the very day it comes in the door ... any funds left over, they are spent on other programs or used to pay off the national debt. But nothing is saved. No money is stashed away in bank vaults; no investments made in real assets." John C. Goodman, President of the National Center for Policy Analysis in an article published by the Washington Times, April 12, 2002.
• "Any government leader who discusses the Social Security trust fund as if it comprises real financial assets with marketable value isn't worthy of being taken seriously." Jerry Heaster, The Kansas City Star, May 11, 2002. "The trust fund is a mirage of promissory notes." July 25, 2001.
• Senator Peter Fitzgerald (R-Illinois) on the Senate floor during lock-box debates, 1999: "A few years back Congress passed laws making it illegal for State and local governments to plunder the pension funds of their employees. But during all this time, where Congress has put these laws on the books and made it illegal in the private sector and at the State and local government level to plunder pension funds, we have gone on and on in Washington taking all the money that goes into the Social Security trust fund, taking every dime of it out, and spending it on some other program. As a result, as I speak now on the Senate floor, there is no money in the Social Security trust fund. All of it has been taken out and spent on other programs. They have put meaningless, nonmarketable, nonnegotiable securities in the Social Security trust fund, securities that have no economic value because they cannot be sold to raise cash. Right now our Government is building up, theoretically, surpluses in the Social Security trust fund, but they are taking all that money out and spending it. So when we actually need it to pay benefits, beginning in the year 2014, there will be no money there. No matter what the balance of those bogus IOUs is in the Social Security trust fund, in the year 2014--whether that balance is $1 trillion or $5 trillion--they are of no assistance in paying benefits to those who depend on Social Security. The country will either have to raise taxes or cut benefits to make up for the shortfall that is anticipated after the year 2014. This legislation is basic, decent common sense. We should not allow Congress to continue frittering away the Social Security trust fund. I urge all my colleagues to support it and end this outrageous practice of plundering the Social Security trust fund, to the detriment of our Nation's seniors and those who will be desiring to live on Social Security benefits in the next century." (Note: Cash never goes into the trust fund, never, not even for an instant. It is always kept in the Treasury general fund until spent.)
• "Mr. President, the thrust of President Clinton's State of the Union address was "save Social Security first." The quickest way to save Social Security is to stop looting Social Security. Over the years, we have looted the Social Security trust fund with wild abandon; we owe it to the tune of some $631 billion right this minute. It should be a $631 billion surplus. But actually, since Congress has expended it on foreign aid, defense, food stamps, and other programs in order to appear fiscally responsible, there is a deficit in Social Security." Senator "Fritz" Hollings in a letter of January 29, 1998 to the Senate.
• "The Social Security trust fund does not provide the resources to close this financial gap. The non-negotiable bonds in the trust fund are essentially i.o.u.'s from the government to itself and must ultimately be repaid by taxpayers...Another targeted misrepresentation is that the Social Security Trust Fund can maintain the system from 2016 to 2038, pushing the need to do something well beyond most people's time horizons. The reason is that the trust fund consists of nothing but U.S. Treasury securities, i.e, federal government IOUs. But how will the Treasury redeem those IOUs when they come due? A 2000 Congressional Budget Office report said, 'To repay what [The Treasury] has borrowed from the trust fund, the federal government must raise the cash by boosting taxes, reducing other spending, borrowing more from the public, or retiring less debt,' making the trust funds essentially just a commitment to massive future tax increases." Thomas R. Saving, one of the Social Security trustees and professor of economics at Texas A&M University serving on President Bush's Social Security reform commission in a New York times article titled "A Social Security Solution" August 12, 2001.
• "The key point is that the Trust Funds themselves do not hold financial resources to pay benefits -- rather, they provide authority for the Treasury Department to use whatever money it has on hand (taxes or borrowed) to pay them." David Stuart Koltz, Congressional Research Service, April 29, 1998.
• "On January 3, 1983, Robert J. Dole, Senate Majority Leader, published an article on the op-ed page of The New York Times, entitled "Reagan's Faithful Allies." It seemed that many people thought Congressional Republicans weren't giving the President the support he needed and deserved. Not so, Senator Dole said, we are with the President and there are great things still to be done. Then this: 'Social Security is a case in point. With 116 million workers supporting it and 35 million beneficiaries relying on it, Social Security overwhelms every other domestic priority' ....That day I was being sworn in for a second term in the Senate. I had read the article and went up to Senator Dole on the Senate Floor and asked if he really thought that, why not try one last time? (They had just spent a year on the Greenspan Commission that went nowhere) And he did think it. A year of listening to Myers had altered a lifetime of Republican dogma. We met the next day. The day after that Barber Conable was brought in, a Republican who both understood and believed in Social Security. On January 15th, 13 days from our first exchange, agreement was reached at Blair House and the crisis passed...Social Security was secure for the time being. Indeed, the payroll tax generated a considerable surplus which we have lived off ever since, and will continue to enjoy for yet a few years. Moynihan at a speech delivered on Social Security Reform to the John F. Kennedy School of Government at Harvard University, March 16, 1998. Back in '83, and once Dole and Moynihan had decided on the amount of tax increase, it was within a month that Congress passed and the President signed a bill raising payroll taxes to their present 15.3 percent level over the next seven years.
• "The Social Security trust fund is what I call a fiscal oxymoron. It shouldn't be trusted and it's not funded. And whether you have one or not, you still have to go out and do the same three things. You either have to try to borrow the money or you're going to increase taxes or you are going to cut the benefits. We’ve spent the money in the trust fund. We may have told the American people that we were setting it aside in a quote 'trust fund.' We spent it on other subjects. Shock of all shocks." Pete Peterson, head of the Concord Coalition and former Commerce Secretary. January 13, 2005.
• "You see that Social Security is now taking in more cash than it spends. Ok, let's fast-forward to 2018, when Social Security is projected to take in $23 billion less cash than it spends. By then, the trust fund would have more than $5 trillion of Treasury IOUs in it. So it would be a piece of cake to cover a crummy $23 billion, right? Wrong. The fund's irrelevant, folks. It's an accounting entry, not real money." Allan Sloan, Newsweek Magazine, February 14, 2005.

http://www.uncle-scam.com/Confessions/statements.html

 

[JakeBrake]

It is not the same situation. If you look at your SS earnings for the years that the payroll tax reduction is in effect you will find that those earnings are not reduced at all as a result of the 2% cut, and the calculation on SS benefits is based on earnings, not how many actual $ a person has paid in.

Alan, thanks for clarifying that. The payroll tax cut won't affect me since I have no earned income.

To paraphrase from the 1040 tax form:

Contributing to the political slush fund will not increase your taxes or decrease your refund.