The Payroll Tax Holiday

For 2011, the payroll tax was cut by 2% in order to provide a stimulus to the economy. Now that that cut is coming to an end, the political games are going full tilt with regard to whether or not there will be a renewal of that cut for 2012. The stakes are high; if the cut is not renewed, the average American family will return to a higher tax level that will cost about $1000. There is also the question of the so-called doctors' fix for 2012. Absent action by Congress, payments to doctors for Medicare services will be cut substantially starting January 1. And let's not forget the Alternative Minimum Tax. The AMT must again be changed by Congress or it will start to hit tens of millions of middle income Americans with a major tax increase, again starting January 1.

Well here is a suggested solution: the House Republicans should announce that they will vote to extend or fix all three of these items permanently, but they will do so only if there is a plan to offset the cost with either other spending cuts or reasonable revenue enhancements. They should call upon president Obama to announce his plan. In other words, call the Democrats' bluff.

The payroll tax cut costs about $120 billion per year. The doctors' fix cost twice that amount. Throw in the AMT fix and the total cost is in the area of half a trillion dollars per year. So what does that mean? Simply put, it means that Obama cannot tax the rich to pay for this stuff. The full amount of the extra tax on the wealthy that Obama wants is about $70 billion per year. Even if the rate is raised to much higher levels, there is no way such a tax could even pay for half of the cost of the three items in the "fix". There will need to be real changes to spending and entitlements. Indeed, Obama will not be able to cut further from defense since that is already scheduled to be gutted by the automatic cuts after the failure of the super committee.

Just imagine if Obama had to actually deal truthfully with the budget deficit. I do not think he could ever bring himself to do that.