The payroll tax shell game
The ballyhooed bill delays a de facto tax hike for millions of Americans — but also undermines Social Security and the economic recovery
I hate to be a Grinch, I really do. But the payroll tax bill passed last week by Congress and signed by President Obama is one of the worst and most disingenuous pieces of legislation to emerge from this town in years. It hurts many of the very same people — the middle class — that these pandering politicians claim to be helping.
The bill extends a 2 percent payroll tax cut through January and February. This keeps an extra $166 in the pocket of an average wage earner for two months — badly needed for millions of cash-strapped Americans in a tough economy. But if you look beyond the bill's short-term benefits, it can be argued that in one fell swoop it:
1. Undermines the integrity of Social Security.
2. Makes it harder for Americans to buy a home, and thus hurts the economic recovery.
This is a shameless election season attempt to buy the goodwill of voters by putting a few bucks in their pockets.
3. Undermines economic stimulus efforts by the Federal Reserve.
4. Makes it harder for the government to unwind its two quasi-private mortgage entities, Fannie Mae and Freddie Mac, a goal espoused by the White House and many members of Congress.
Let's start with undermining Social Security. For 75 years, the central tenet of the popular entitlement program was that workers would pay in, and when they retired, they would receive benefits of their own, paid by younger workers. Pretty simple concept. This covenant has now been upended, in part, by a shell game. To finance a tax break that lasts a mere 60 days next year, the president and Congress agreed to levy fees on Fannie Mae and Freddie Mac, the two mortgage guarantors, for 10 years. Thus, a portion of Social Security's future cash flow is now tied to the wobbly housing market. Feel like your retirement's more secure because of this trickery?
What about the current 12-month payroll tax break that ends on Dec. 31? To pay for that, the president and Congress made a similar boneheaded move last year: They just tacked the cost onto our ballooning debt. By altering the way in which it finances a portion of Social Security benefits, by stepping away from the successful model it has used for three-quarters of a century, the government has undermined the program — with nary a squawk from the public.
This leads to point two. In case they didn't get the memo, the president and Congress might benefit from knowing that the housing industry is on its back. They don't seem to know that housing prices, which have been falling for more than half a decade now, are likely to fall further in 2012, as a new wave of foreclosures hits the market. "It's hard to convince yourself that you've got to buy a house right now,' Standard & Poor's David Blitzer admits to USA Today. Not even record-low mortgage rates are enough to bring out the buyers. So if cheap prices and cheap credit aren't enough to spur sales, how will tens of billions in mortgage fees be generated as the bill intends? I'm not sure the politicians have really thought this one through.
Now here's the part where many middle-class citizens will get hurt by the president and Congress. Let's say you buy a house and take out a 30-year fixed-rate mortgage for $200,000. Because Fannie and Freddie would pass along the bill's higher fees to you in the form of a slightly higher interest rate, you'll wind up paying — get this — an extra $4,000 over the life of the loan. Four grand — just so you can get a $166 break now? Step right up, folks.
The idiocy doesn't end there. Since their bill effectively raises mortgage rates, thus making home ownership less affordable, Mr. Obama and Congress are contradicting the Federal Reserve, which is trying to push rates down by buying $400 billion in long-term government bonds. This latest Fed effort to stimulate the economy — nicknamed 'Operation Twist' — was launched just three months ago.
And speaking of the twist, the president is doing just that himself. By agreeing to turn Fannie Mae and Freddie Mac into a golden goose for the next decade, he (and many members of Congress) have contradicted themselves on another goal: Shutting the mortgage agencies down. Just last February, the White House issued this proposal on the Treasury Department's website:
The Administration will work with the Federal Housing Finance Agency ('FHFA') to develop a plan to responsibly reduce the role of the Federal National Mortgage Association ('Fannie Mae') and the Federal Home Loan Mortgage Corporation ('Freddie Mac') in the mortgage market and, ultimately, wind down both institutions.
I guess it depends what you mean by "ultimately." And you can bet no one is happier about this astounding flip-flop than the employees of Fannie and Freddie, who will probably hang on to their paychecks for — oh joy — at least a decade more.
Let's call this two-month payroll tax extension — like last year's 12-month deal — what it is: A shameless election season attempt to buy the goodwill of voters by putting a few bucks in their pockets (or more accurately, keeping a few bucks from leaving). Don't get me wrong. Helping decent, hard-working Americans keep more of their money, especially when times are tough, is always the right thing to do. But this isn't the way to do it. Hopefully when Republicans and Democrats get back from their extended holiday break and begin haggling over how to help folks for the remaining ten months of 2012, they'll come up with something better. Something that doesn't force them to choose between good politics and bad policy. Which, sadly, is exactly what we have now.