Layman’s Terms: The Two-Month Payroll Tax Cut Extension

Gather round, folks, it’s time for a little story.

As long as I’ve been alive, the federal government has taken 6.2% out of workers’ paychecks to fund Social Security for the people who aren’t working anymore. Then at the end of the year 2010 Congress was looking for ways to spend money to make people happy, but they couldn’t just give people any more stimulus paychecks because that was too obvious. So somebody had the bright idea to reduce everyody’s payroll tax from 6.2% to 4.2% for the year 2011. This would put more money in people’s pockets and stimulate the economy and bring a magical paradise to all.

Before long, a year had passed and all that extra money was gone. All the economists warned that if the payroll tax went back up to 6.2%, the “fragile recovery” would be severely damaged. Suddenly, Obama and the Democrats were arguing that we needed to stop taxes from going up, and the Republicans were arguing that we needed to let it expire because we couldn’t afford to keep what was originally supposed to be a temporary cut (Never mind that each party had used exactly the opposite argument when it came to extending the “Bush” tax cuts a year earlier…. Fortunately those were extended for two years so we still have twelve more months before that fight comes up again.) For awhile the Democrats actually wanted to lower it another percentage point, and the Republicans thought this was horrible! The hypocritical ironies of it all would make me laugh uproariously if each side didn’t just use the other’s hypocrisy to double-down on their own silly entrenched positions.

Eventually, though, everybody agreed that the payroll tax cut needed to be extended for another year, but as usual they could not agree on how to pay for it. (But at least this time they agreed that they needed to pay for it.) Generally the Republicans wanted to cut some spending and the Democrats wanted to raise some taxes. But even after several months of debating these kinds of things for the debt ceiling and a government budget or two, the government still wasn’t willing to make some hard choices (like admitting that we can’t have lower taxes and lots more spending for forever!).

So with time winding down, the Democratic-led Senate decided that they would extend the payroll tax cut for a mere two months and promise to use that extra time to figure out a way to add the remaining ten months of 2012 before the end of February rolled around (as if the next two months would be any more productive than the previous two months). The Republican-led House said they would have none of that, rejecting the measure and refusing to consider anything but a full year extension and vowing to figure out a way to pay for it. The knowledgeable talking heads said the Republicans were being obstructionist again, throwing a tantrum and refusing to compromise because the last time this happened it pretty much worked and they got the Democrats to cave into their demands.

Then suddenly the Republicans did change their minds and passed the two-month extension. The knowledgeable talking heads said the Republicans had been dealt a devastating defeat (See, first you attack the Republicans for not cooperating, and then you call them defeated when they do cooperate. Win-win.) Most of the articles I read focused on the political battles and the promises to get the full year worked out later, but I had a hard time figuring out if or how the extension was paid for. Apparently it has to do with having Fannie Mae and Freddie Mac charge lenders more to guarantee loans, which generally sounds like something that will make it harder to buy houses, which is generally a good thing if you think the government helped cause this crisis by making it too easy to buy houses. Of course, if finagling Fannie and Freddie only bought Congress two out of twelve stars, I have no idea what they’re going to do now to nab the other ten. (No chance they’ll actually cut some actual spending, which is actually¬†still up this year.)

But anyway. What does all that mean for you? Basically nothing. Instead of the government snatching 6.2% of your paycheck for Social Security like it did before 2011, it will continue to snatch 4.2% of it like it has for all of 2011 until February 29, 2012. Unless, of course, Congress figures out a way to pay for extending it again. But at least they actually paid for this extension. And it looks like they might even pay for the next one. Personally I think the easiest way to pay for it would just be to let it expire, instead of adding yet another item to this nonsensical strategy of basing government budget forecasts on things that expire in a year but then always extending them so they never actually expire – but I guess that’s still too hard of a decision for now. After all, who wants to give up free money?