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Payroll tax could postpone Congress' Christmas; Solve the problem by eliminating the Social Security wage base

It's time to play the unofficial Congressional Christmas song:


Yep, if Senate Majority Leader Harry Reid has his way, it will be a Blue Christmas for Congress, which will be stuck in D.C. dealing with the payroll tax cut, set to expire Jan. 1, 2012.

"We are not going to go home to vacations," said the Nevada Democrat at a Capitol Hill news conference. "Does this mean embarrassing Republicans, humiliating them? Probably -- as it should."

Reid said that he spoke with Obama, who said he'd stay in town, too, until the payroll tax cut issue is finalized.

House Speaker John Boehner (R-Ohio) said he and his Republican colleagues are still trying to put a payroll tax cut proposal together.

Right now, the payroll tax collected from workers is 4.2 percent, a two percentage point reduction from the normal 6.2 percent.

Republicans have offered proposals to extend it at that level for another year.

Democrats want to reduce it more, to 3.1 percent, and pay for the added cuts by imposing a surtax on millionaires.

Concern about Social Security's future: While offering tax cuts is a tried and true election year ploy (remember, in 2012 we get to vote for president again, along with a lot of Senate and House races), some folks are having doubts about the continued reduction in revenue to pay for Social Security benefits.

The cut this year has reduced Social Security revenues by $105 billion. For the first time in the program's 75-year history, the national retirement plan took in less money than it paid out.

And the timing couldn't have been worse. The first group of Baby Boomers this year began collecting Social Security.

It's not just Republicans raising red flags about Social Security. David Welna reported today in a piece for NPR's Morning Edition:

Bernie Sanders, the Vermont independent who caucuses with Senate Democrats, says he agrees with Obama that middle-class families and the working poor need tax relief to weather tough economic times.

"My concern is diverting hundreds of billions of dollars from the Social Security trust fund into that immediate tax relief," Sanders says. "So I would love to see tax relief, but done in a different way."

Eliminate the wage base: Here's an easy way to cut the payroll tax rate and keep money coming into Social Security: eliminate the wage base limit.

Right now, Social Security tax is collected on the first $106,800 dollars earned. If you make more than that, then the excess earnings escape the 6.2 percent, or, for the 2011 tax year, 4.2 percent tax.

For 2012, the Social Security wage base for tax collection purposes will be $110,100.

Workers also pay a 1.45 percent Medicare tax. That amount is collected regardless of how much is earned. And employers match their employees' Social Security and Medicare tax payments.

By making the Social Security tax like the Medicare tax, that is, eliminating the earnings limit, Uncle Sam could keep the tax rate lower and still collect more tax.

A Congressional Research Service study in 2010 on this issue found:

Raising or eliminating the cap on wages that are subject to taxes could reduce the long-range deficit in the Social Security Trust Funds. For example, if the maximum taxable earnings amount had been raised in 2005 from $90,000 to $150,000—roughly the level needed to cover 90% of all earnings—it would have eliminated roughly 40% of the long-range shortfall in Social Security. If all earnings were subject to the payroll tax, but the base was retained for benefit calculations, the Social Security Trust Funds would remain solvent for the next 75 years. However, having different bases for contributions and benefits would weaken the traditional link between the taxes workers pay into the system and the benefits they receive.

Pros and cons: Supporters of changing the wage base point out that only 6 percent of workers have earnings above the base in any given year. However, because of rising earnings inequality, the amount of their earnings that escapes taxation has risen from 12 percent to 15 percent since 1991, and is projected to continue to rise through 2014.

That means, they say, the current tax structure and its earnings' limit favor a small group of the country's more well-off workers.

Those who support keeping the wage base limit argue that while the payroll tax structure may be regressive, it is offset by the progressive calculation of benefits.

Also, they point out that other tax benefits, such as the Earned Income Tax Credit, were created to mitigate the Social Security tax bite.

And, say wage base fans, raising the earnings amount or eliminating it would be a disincentive to work and could serve as a drain on the economy.

What do you think? Keep the Social Security wage base limit as is? Increase it more than a few thousand dollars a year? Eliminate it altogether?

Holiday plans on hold, or not: I won't be surprised if the House and Senate are still in session as Dec. 25 nears. I predicted the payroll debate would cut into seasonal plans when the Senate shot down a couple of proposals last week.

While it's not fun to work while others are out enjoying holiday festivities, it's not unusual in Washington, D.C. I remember several Christmas Eves when Hill staff were stuck while their bosses were busy posturing.

And just in case you're wondering, Mrs. Obama and the girls will go on their traditional holiday outing to Hawaii without the president. They can bring him back a can of macadamia nuts.

As for lawmakers stuck in the nation's capital, maybe they can get some Elvis impersonators to come to town to serenade them between floor fights.

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