The latest gimmick to fund the payroll tax cut - stupidity

We have a week left to resolve the issue of extending the 2% break on Social Security taxes (FICA&SECA). I still think there will be a last minute fix on this; it’s too important. Without this tax break the economy will hit a wall next year. Whatever your thoughts are today about the prospects for a recession in the next 12 months, you’ll have to revise the odds way up if congress fails to get a deal. It’s a measure of just how economically vulnerable we are that 2012 is make-or-break as a consequence of how this plays out.

The latest insanity on this topic comes from the WSJ today.

The deep thinkers in D.C. are trying to offset the cost of the one-year 2% reduction ($115B) in payroll taxes by levying an incremental cost onto Fannie and Freddie and therefore those with mortgages. This is the worst kind of whack-a-mole thinking. There is not an economist worth his salt that does not recognize that housing/mortgage costs are central to any long-term recovery for the economy. The knuckleheads in Washington want to add $38billion a year (for the next decade) onto mortgage borrowing costs. I’m sorry, but they’re idiots for even proposing something dumb like this.

My proposal is simple. Make corporate America pay for this tax break. Raise the FICA tax on large corporations by ½%  (from 6.25% to 6.75%) for the next five years. That’s peanuts ($30B a year). They will never feel it.

My suggestion is that smaller companies be excluded from the incremental tax. Those entities that hire less than 1,000 workers or have revenues less than $25 million would be exempt. This group of companies represents about 20% of all companies. The other 80% would foot the bill. It would, therefore take 5 years to “pay” for the 2012 tax-break for workers.

I’m not in favor of any tax increases or more government spending. But if there has to be a tax break in 2012 I can’t think of better way to raise the revenue than from large corporations. Consider the history of tax revenue in this country.  (Data from Congressional Research Service PDF-Link)

1952 corporate tax as a % of GDP = 32.1%

2010 corporate tax as a % of GDP = 1.3%
(A 95% drop)


1952 Payroll taxes (Social security) as a % of total federal revenue = 9.7%

2010 Payroll taxes (Social security) as a % of total federal revenue = 40.0%
(A 400% increase in the burden on workers)

Our political leaders are so deeply in bed with large corporate America that they have not even considered a very small and temporary corporate tax increase to fill an important bucket. Instead, they want to pass the cost onto those who desire to own a home.

This business about the payroll tax cut is hardly worth noticing in our big economy. But we can’t figure out how to pay for even this small step. The reality is we need a plan to raise about $2 trillion of additional revenues over the next decade. If our leaders can’t suck it up and realize that corporate America has to shoulder its share of the burden on a one-year payroll tax cut, then we don’t stand a chance in hell of coming up with the $2T we need.

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