Wednesday, November 30, 2011

How Will Congress Pay for 2012's Extensions of the Payroll Tax Holiday & Unemployment Benefits?

Not much to talk about in the market - just like Monday it's a day where just about everything is up.  Completely bipolar action continues - last week you couldn't find anyone to buy a stock, and this week selling is completely unfashionable.  Remember Monday when EVERY S&P 500 stock was up around 10 AM?  [Nov 28, 2011: An Amazing Moment]  Now we have another epic day - only 2 S&P 500 stocks down.  In retrospect Monday's action now leads us to ask "who was tipped off on this morning's news" - i.e. who got the "wnk" in 1 on 1 conversations....


So let's look at other topics.  We've been giving 'stimuli' in one form of another to the American consumer since 2008 (remember those Bush rebate checks?), as the organic economy seems dysfunctional without massive intervention.  It is nearing the point, 1 in every 5 dollars of income for the typical American is coming from government.  (last I checked it was about 5.3) [Jun 6, 2009: 1 in 6 Dollars of Income Now via Government - Highest Since 1929]  The latest iteration of this was last year's payroll tax reduction of 2% which gave between $1000-$2000 to the typical household in 2011.  Of course much of that went directly into Saudi hands as gas prices spiked (no relation to QE2) this year, but some seeped into the most important economic function in the country: shopping.  I wrote at the time that this 'temporary' measure would be extended again a year from then because the GOP would cry "how can you raise taxes in this environment!"  Well I was wrong, it is actually Obama using the GOP line.  Irony at it's best.  The bigger theme is when you give something away in this country, there is almost no way to take it back politically - almost everything 'temporary' becomes 'permanent'.  There is some scuttlebutt that this tax holiday may not get extended - I say nonsense.  It will get done (along with the 'emergency' unemployment benefits) - both costing just under $200B.  Because we need our annual stimuli.

So the question is will Congress try to find a way to offset the costs?  Or just throw it under the 'emergency spending' provision, in which no one has to account for a darn thing.  That, I don't know, but CNNMoney looks at some of the options.  Regular readers will know one of the options - which is using a new measure to undercount inflation even further.  [Nov 7, 2011: Congress Considering Moving to a New Measure of Inflation that Would Measure "Away" Even More Inflation]  This was supposed to be one of the main tools during the $1.2T deficit reduction negotiations but since that fell on its face, it can instead be used to 'fund' our annual 'temporary' stimuli.  The other one is the same phony "war savings" that also was going to be used as part of the $1.2T deficit negotiations.... when all else fails, funny accounting solves many ills.

  • At issue are several expiring provisions of law: a Social Security payroll tax cut; long-term federal unemployment benefits; a "doc fix" to ward off a scheduled cut in Medicare physician pay; and a bevy of temporary business tax breaks.
  • Whether they're extended or not, the measures could end up increasing the 2012 deficit. Two possible outcomes:
  • --Congress lets the payroll tax cut and unemployment benefits expire. Many economists worry economic growth will slow because Americans will spend less. Slower growth means tax revenue falls and demand for safety net programs grows. Deficit goes up.
  • --Lawmakers extend the payroll tax cut and jobless benefits in conjunction with a one-year doc fix and at least one key business tax break. Cost to federal coffers: About $180 billion. Deficit goes up.
  • Of course, Congress could choose to offset all or part of the cost. But it won't be easy.
  • Obama and Senate Democrats have proposed paying for the payroll tax relief with a surtax on millionaires. Republicans have said that won't fly.  Many Republicans are also likely to oppose any other tax increase proposals.
  • Democrats are said to be considering applying war savings from the drawdown of U.S. military efforts in Iraq and Afghanistan. But many budget experts consider such a pay-for a gimmick since those savings are going to be realized regardless.
  • As for other spending cuts? The low-hanging fruit has already been plucked or otherwise identified as necessary for deficit reduction.  "It's hard to see what the spending cuts would be that would be acceptable to everybody," said James Horney, vice president of federal fiscal policy at the Center on Budget and Policy Priorities.
  • Rudolph Penner, a former Congressional Budget Office director, said there may be one possibility for savings: a change in how annual inflation adjustments are calculated for government benefits and tax brackets. Such a change could raise an estimated $217 billion if left in place over a decade, according to the Congressional Budget Office. (of course another grand solution is to pass this inflation measure change in conjuction with the spending increases, then when older people complain they are getting ripped off, reverse it in a year or two - which of course meant you offset nothing. That would be typical D.C.)
  • And it has gotten some bipartisan support in various quarters. "That could be put in place for however long it took to pay for all or part of any deficit-increasing measures," Penner said.  But that policy proposal has drawn a lot of fire from the left, because it would reduce annual cost-of-living increases in Social Security. 
  • So that leaves one other option if lawmakers want to pass the payroll tax cut and unemployment benefits. They could deem the extensions to be emergency spending.  That way, the new costs would be exempt from any requirement to pay for them.  Both Horney and Penner said they wouldn't be surprised if Congress took that route.
  • If the payroll tax cut is allowed to expire, a person making $35,000 will pay an extra $700 in payroll tax next year and a person making $75,000 will pay another $1,500.

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