On the Money Trail
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A New Year's Gift from Uncle Scrooge

by Al Jacobs, author of Nobody's Fool: A Skeptic's Guide to Prosperity

January 2012

The headline in my local newspaper in the waning days of 2011, proclaimed: “Tax cut caps Obama’s year.”  The article continued with: “On a political high, President Barack Obama capped a bruising year by securing a tax cut for millions of Americans – an achievement that overshadowed Washington’s deepening dysfunction and the slow progress of the economy on his watch.”

The article describes the tax cut achieved: a 2-month extension of the two-percent FICA payroll tax reduction, in effect since the beginning of 2011.  The practical effect for a family earning $50,000 per year totals about $165—not exactly a life-changing event. 

Regardless of whether or not you support tax reductions generally (yes, there actually are persons who oppose them), there is a more fundamental question involved here.  The FICA payroll tax is designated as the source of Social Security and Medicare payments to recipients.  Inasmuch as both programs are notoriously out of fiscal balance, with their anticipated default a subject of continual debate, it’s argued any payroll tax cut which lessens this revenue stream will further jeopardize the program’s inherent solvency.  In response, it’s contended FICA is not really the source of funding, inasmuch as those funds, since the 1970s, are vectored at once into the general fund.  Thus, any shortage in FICA receipts is simply made up by an allocation of general tax revenues.

As a whimsical aside, there are many who contend FICA withholdings deserve not even to be classed as taxes.  They are, instead, proclaimed to be contributions, implying a voluntary offering by which the contributor somehow retains a vested interest in the offering, to be entitled at some future date to recovery.  The fact no written documents exist conferring any such benefits doesn’t seem to dampen the enthusiasm of the adherents.  Be assured, however, as far as the collectors in the government are concerned, the FICA withholding is a tax—in every sense of the word.  Regardless of your opinion in this little controversy over terms, at least the president enjoys boasting rights when he claims to be a tax-cutter.   Of course, from the standpoint of the contributor the technical definition really doesn’t matter, as the following poem illustrates.

Call it duty, charge or fee

Makes no difference, wait and see

You will surely find the same

Tax by any other name

Smells as sweet . . . cuts as deep.

In any event, it’s clear the 60-day partial respite in payroll withholdings, portrayed as being enacted over Republican opposition, provides miniscule benefit to American workers.  If not for a well-orchestrated chorus of hosannas from the media, it would have gone unnoticed.  However, you must recognize that in this highly charged electioneering atmosphere, where political posturing is the be-all and end-all, reality takes a back seat to illusion.  In his efforts to block passage and substitute more meaningful legislation, House Speaker John Boehner was effectively portrayed as the Grinch who stole Christmas.  In the final analysis, he had no choice but to finally approve the farce.

Thanks to a large and powerful voting bloc of senior citizens, it’s the rare elected official that dares support a program appearing to limit or restrict Social Security or Medicare benefits.  A winning strategy usually involves some offering, however nonsensical or financially corrupt, which appeals to the oldster.  This cynical approach knows no party affiliation.  President George W. Bush commenced his 2004 reelection campaign with Part D Medicare, offering subsidized drug benefits to all Medicare recipients.  That it helped empty the U.S. treasury seemed never to be a consideration.

So much for President Obama’s payroll tax cut and what appears on the surface.  We must now take a glance behind the scenes to get a more complete view of what has been foisted upon the American citizen.  If the legislation just enacted, which also includes a temporary extension of jobless benefits as well as a delay in reduction of Medicare payments to physicians, did nothing else, it might be dismissed as much ado about nothing.  Unfortunately, this is not the case.  As with so many other laws that work their way onto the statute books, the devil is often buried in the details.  This one is no exception.  Slipped into the fine print is a provision wherein the fees paid on all Fannie Mae and Freddie Mac loan guarantees, roughly 65% of the entire home loan market, will be boosted by ten basis points, or one-tenth of a percent, for the ten-year period through 2021.  Currently the typical fee is about 27 basis points, so this change represents an increase of over 35%.  This translates to an added cost of about $4,000 over the life of a $200,000 loan.  We’re no longer talking petty cash; these are meaningful dollars, with the charge to the citizen up, not down.

It’s still a long trip to Election Day, 2012.  Between now and then we’ll witness more of what just transpired.  Americans will either pay attention to what is being done or simply be swept along with the tide.  If it is the latter, then the old adage holds true: “And so it only goes to serve, that people get what they deserve.”