It’s easy to blow it as a grandparent.  A burning desire to score some points with those little lovable beings is often overpowering.  So I allowed them to cheat a fair amount on their bedtime the first night, even though I knew their parents would scold us all if they saw what was happening.  I resolved to make night two different, to strictly honor the rules.  But I discovered, in the loudest possible way, that I had created an expectation in round one that would insure my status as dog meat in the second round.  I was a fool for not appreciating the downsides of messing with bedtime protocol.

Our leaders have created the same type of expectation mess by temporarily screwing with the payroll tax, that horribly regressive tax that I dub the “invisible gorilla.”  I have used this label for a longtime because it’s a big, ugly tax that punishes middle- and low- income workers, but is usually completely ignored (deemed invisible) by our leaders. For eighty percent of working Americans, the payroll tax bite on their incomes exceeds their income tax hit, often by many times.  But it’s the income tax that usually gets all the attention.

Why the invisibility?  There are a few reasons.  It’s a simple tax that automatically skims right off the top 15.3 percent of the first $106,800 (2011 number) earned by a worker.  No deductions, credits or messy returns for the employee. The employee sees only half of the bite in the pay stub; the other half, although ultimately sucked up by the employee, is paid by the employer.  A self-employed person directly pays and sees the whole tab and often is shocked to discover the impact.

But the most compelling reason for keeping this tax in the closet is that it is the funding vehicle for Social Security.  An elected official can’t mess with the payroll tax without triggering ugly questions about the financial fate of America’s seniors, something that promises political risk and encourages vicious demagoguery. Plus, until very recently, the invisible gorilla generated revenues that far exceeded current Social Security obligations, creating excesses that were deposited into a porous trust fund and then instantly appropriated to cover other government expenses.  It was a handy way of shifting a larger part of government expenditures onto the backs of middle- and low- income workers, while creating a phony illusion of long-term sustainability.  So there was no incentive to move the gorilla to center stage.

But the crazy political theatrics of the last minute 2010 hassles to extend the Bush tax cuts created an opportunity for something totally unique – a payroll tax holiday.  Obama lead the charge to temporarily mess with the gorilla by reducing the employee’s share of the tax by 2 percent for one year – 2011.  It cost the government – and drove up the deficit – $120 billion.  The stated rationale was to stimulate our sick economy, but all knew that it was a ploy to offer working Americans something tangible in the same bill that allowed the unemployed to celebrate their extended unemployment benefits and the rich to savor the extended Bush tax cuts and monstrous temporary estate tax breaks.  And since all notions of fiscal responsibility were being tossed out the window anyway, spending another $120 billion on a bad idea was in the cards.  It was called a “holiday” because it was supposed to last only one year, just like my loose bedtime standards were to be limited to one night.

But, like my bedtime follies, this payroll tax holiday may be coming back to bite us all, and it could turn into a disaster.  Obama is leading the charge to double-down on the madness, proposing to extend the holiday another year and to expand it by increasing the break for employees from 2 percent to 3.1 percent and by eliminating the tax on employers for the first $5,000 paid to an employee and all amounts paid to new hires. The one-year price tag would balloon to a whooping $264 billion.  Obama proposes to cover the cost with a special 3.25 percent surtax on those who earn more than a million, primarily business owners.

So the holiday has now been teed up as the ultimate class warfare stand-off on the eve of the most crucial election campaign most of us have ever experienced.  Obama is aggressively feeding a mammoth future expectation problem by proclaiming that a failure to extend the holiday would constitute a tax increase on working Americans.  So the temporary break is quickly morphing into an entitlement.  It stirs passions and triggers the kind of emotions that made me the bad guy on night two.

And, of course, it poses some very troubling questions about the future. What does Obama hope to accomplish with his push for the holiday extension, as our country continues to spin out of control?  Does he really want an extension for just one more year?  If so, won’t that only create a much bigger expectation problem next year as the expiration date approaches?  Or is he hoping for something more permanent?  Is he just throwing in the towel on our unsustainable Social Security program, which he refuses to tackle? Could this be a ploy to ultimately force massive cuts in Social Security benefits that would further punish high-income earners?  Or is it possible that Obama just doesn’t give a hoot about any consequences beyond next November and that he’s messing with the gorilla for the sole purpose of fueling the centerpiece of his reelection bid – a massive class warfare campaign that portrays the Republicans as the guardians of the rich?

What is clear is that the payroll tax holiday of 2011 has done little or nothing to strengthen the economy long-term, certainly nothing that could possibly justify another $120 billion of debt. All it did was hike the deficit, aggravate our unsustainable Social Security crisis, and create a huge expectation problem that many will seek to leverage for political advantage in the worst possible way. There is no reason to believe that an extension of the holiday will produce anything different.  We’ve witnessed the destructive impacts of politically motivated, temporary gimmicks that have been used to mangle the income tax.  The payroll tax should not suffer a similar fate. Although the tax is regressive, mean, and in need of repair, it is and always has been the backbone of Social Security, and it should be restructured only as part of a comprehensive plan to save Social Security. The 2011 payroll tax gimmick should be written off as a costly mistake and not be extended.

This does not mean that the payroll tax should remain invisible.  The time is long overdue to responsibly restructure Social Security and put it on a sustainable path that will serve the interests of America’s young and old.  The payroll tax will be the key ingredient in any such restructuring effort.  But until our leaders develop the political will to responsibly tackle our Social Security crisis, the danger of messing with the gorilla should be acknowledged, and every effort should be made to prevent its misuse as a funding tool for other government expenditures or as an expensive campaign gimmick to whip up voters with another promise of a few extra bucks.

November 30, 2011