The Payroll Tax Holiday Needed to End

The payroll tax holiday is over. Americans are finding their paychecks a bit smaller in 2013, thanks to a two percent hike in payroll taxes. And Americans of all stripes are angry.

Jeffrey Curl of the Washington Times acerbically reports instances of anger and frustration among Barack Obama's "sycophantic supporters." "Democrats that supported the president's re-election just had NO idea that [Obama's] steadfast pledge to raise taxes meant he was really going to raise taxes," Curl sardonically writes.

Becket Adams of the Blaze laments that this "tax hike" brings some certainties. "Everyone's taxes are going up," he writes, and "the increase has done away with an entire year's worth of wage gains."

Yes, it's politically convenient to suggest that this is a grand "I told you so" moment for conservatives. But by making this argument, conservatives offer the implication that ending the payroll tax holiday is a bad idea for the American people. And taking this position only evidences an irrational distaste for anything labeled "tax hikes," not a belief in fiscal responsibility.

The payroll tax holiday was never a fiscally responsible initiative. Ending the payroll tax holiday is. It's important that we understand why.

Not all taxes are created equal. Federal income taxes, for example, (which, as we know, only 53% of Americans pay) finance various government programs, including defense, education, environmental programs, etc. Liability associated with these programs is largely amendable, meaning that revenue and expenditures can be reconciled via budgets. Ideally, if revenue falls, spending can be curtailed, and vice versa.

Not so with payroll taxes. Payroll taxes are specific contributions to the Social Security trust funds, which serve the dedicated purpose of paying out set living benefits -- both guaranteed minimum income and disability benefits -- to Social Security recipients in the manner by which the government is contractually bound. In this sense, the Social Security trust funds are not unlike the general account of an insurance company. And contributions are not unlike premium.

At least that's how Franklin Delano Roosevelt saw it. When Social Security was legislated, FDR was insistent that benefits to the "old-age insurance" component of Social Security were contributions to an insurance program, and not taxes. "We must not allow this type of insurance to become a dole through the mingling of insurance and relief," he said. "It is not charity. It must be financed by contributions, not taxes."

The problem, however, is that the government cannot legally appropriate insurance contributions. Congress has the power to "tax," but not the power to coerce Americans to purchase insurance, including deferred income annuities and disability insurance. Thus, we have the legacy of this rhetorical shell game where politicians disguise payments to segregated risk pools for social insurance programs as "taxes." (Sadly, this confusion persists to this day, as it was on these grounds that the individual mandate of the Affordable Care Act was upheld by the Supreme Court last year.)

The simple truth is that the very idea of the payroll tax has never been an issue of economic responsibility or sense, but one of political expedience. FDR confessed this to Luther Gulick in 1941, who suggested that it was a mistake to levy payroll taxes to fund Social Security during a depression. FDR simply responded, "I guess you're right on the economics. They are politics through and through... those taxes aren't a matter of economics, they're straight politics."

Within six years of the passing of the Social Security Act and after his third election, FDR had handily promoted the idea that it was the federal government's proper role to use taxpayer funds to promote the general welfare. And sadly, he had done this job so well that his confession that he irresponsibly appropriated taxpayers' wealth for the sake of politics was just no big deal.

Social Security is a burdensome inheritance for Americans, one that was born in reckless political ambition and nurtured throughout the years by ignorant Utopian idealism. But nonetheless, it is a reality. And we should aim to deal in the realm of reality.

And the reality is that payroll taxes are not meant to interchangeable with other revenue generating instruments that the government has at its disposal. While I maintain hope that Social Security can be reformed to be more sustainable, the payroll tax holiday needed to end for the good of all Americans, and it does no good to take Obama to task for his role in ending it. After all, we are the better for this having been done, and it would be truly regrettable if public confusion about the purpose of payroll taxes causes Republicans to pledge a renewal of the payroll tax cuts in the future.

Certainly, history bears the proof of instances where tax cuts and responsible spending limits have created prosperous economic conditions. But a payroll tax cut only serves as a massive debt driver, because it is always necessary, if benefits are to be paid, to replace this lost revenue by taking on debt, which was estimated to be over $120 billion for 2012, adding to the $8.6 trillion shortfall in the Social Security trust funds.

Americans should be taking issue with the Democrats and Republicans who supported implementing the payroll tax holiday in the first place. It was "politics through and through," a clever ruse to give the appearance of a tax cut by underhandedly defunding Social Security. Because of this whimsical decision, we have taken on hundreds of billions in new debt from foreign entities. And we, our children, and our children's children will likely have to pay this debt and the interest for years to come.

The end to the payroll tax cut signals an end to at least some of this fiscal bleeding. And to argue that this is a bad thing is to argue against fiscal responsibility.

William Sullivan blogs at can be followed on Twitter.