Maybe we shouldn’t have the end of the year during the holidays. Yes, it is one of the holidays itself but maybe they are too concentrated here on the long tail of the annum. Legislative and other periods link to the end of the calendar year causing deadlines to loom just when offices are empty or emptying. Once phones rang unanswered from Thanksgiving Wednesday to January 2nd. Now they roll over to voice. Which is more cruel? There are a few folks still on the job although they eye the clock nervously and jostle their keys. They are trying to “get things done” and whatever that means it apparently means the same thing two days before Christmas as it means on any other day at the Capitol and the White House.

The tangle is deep and tight. If you know your players and their CVs, the sides seem oddly inverted. President Obama and his Democrats propose an extension of a cut in taxes that is scheduled to expire, or “sunset” come the New Year. This is to benefit the “middle class” through tax relief. The mindless, toothless Republicans running riot in the House are opposed. Only their opposition comes in the form of a yet longer extension of said tax cut. Say what? This is no simple INversion, more like a PERversion of sense and consistency that is opaque to anyone spending less effort to understand it than a crossword might require, which is nearly everyone. This inky maelstrom has been decades in the making.

To begin, the tax is no tax. Except when it is. The Federal Insurance Contribution Act’s deduction from your paycheck is not a tax. It is a compulsory insurance premium, sound familiar? By law these funds are NOT supposed to fund general government operations but whatever is not paid in bennies and overhead is to be kept in a trust; that famous Lock Box. But what is that? It turns out the Lock Box is just another ledger entry invested in secure, long-term instruments of impeccable provenance; Federal Treasury Bills which, do what? Fund general government operations. And these are not ordinary T-bills but special non-convertible bonds that can’t be bought or sold, only redeemed. On their schedule. So there is a largish dollop of The Full Faith and Credit of the United States of America on deposit but you aren’t going to be cashing it in. Whatever Social Security’s convoluted liabilities finally amount to is  tomorrow’s mystery. In the here and now the money taken out of your check under FICA is not a tax when Republicans complain that large portions of the nation pay no taxes (they mean income taxes). It is a tax when Democrats want to give “refundable tax credits”; direct cash payments not otherwise plausible. In this both parties have been on both sides. Ephemera like this is much of what occupies the time of your Legislators and it is relevant only to demonstrate how thin and threadbare the whole controversy is. But if it isn’t a tax, it is certainly a levy, the eccentricities of which we have discussed before.

Let’s go ahead and call it a tax cut. How did our players get on the wrong sides of the stage for this one? While it was incorrect and impolite to say that the $80 per month this would add to the average take-home is trivial to the taxpayer it is trivial as a tax event. This sort of tax cut or a concomitant tax hike that is transitory, tiny or otherwise co-opted was practiced first by Mike Huckabee (later Mitt Romney) to generate a functional answer when he was accused of being profligate as a Governor. “Well, I cut taxes seventeen thousand times!” The “times” are immaterial, it is the total relief that matters economically and mathematically but whatever. The precedent is well set and the media refs have already called this an Obama ball so let them take it. If Boner’s benchwarmers want to get back on the board they need a couple new plays.

It may be infuriatingly mysterious how Boner’s proposal for a 12 month extension of the FICA cut rather than 2 months STILL marks the Right out as the pillager of paychecks but the rejoinder suggests iteself; if 2% is good, why isn’t 4% better? Or 8%? Heck, we can make it a 100% tax cut while only raising it to 12.4%! Certainly there is some leverage available. This would be consistent with that old, sadly improper, stereotype about Republicans never having met a tax cut they didn’t like. Indeed that is the trap Boner has fallen into. The fulcrum that has allowed it to be turned into a figure-four neck break is that reliable Third Rail of politics, Social Security.

Reagan first made his famous rejoinder regarding Medicare but the point applies to all modern entitlements. Mr. Carter denounced Reagan for wanting to de-fund and defenestrate that particular program…. “There you go again,” was the response. Rather, Reagan would “fix” Medicare and also Social Security by making them “solvent”, how? Increased taxes, of course! Although we know they are NOT taxes; and it gets more complicated from there. The once New Dealer, Reagan, indeed seemed to have no animus towards Social Security or Medicare, certainly none based on small-government idealism or Constitutional principles. For him and all his heirs these programs actually WERE what they are not so cunningly disguised as, namely insurance. So their off-book accounting was proper and continues to this day. Social Security and Medicare related liabilities are not considered part of the national debt now over $15t and many other commitments of the government to future payments are likewise obscured in folds of deception.

This was the great aim and result of Social Security; to lay a tax disguised as something else in order to fund a government expansion in all realms and all directions. It is an invisible tax hiding in plain sight. It is chicanery and diversion of this sort that the Republicans should make it their vocation to unearth and denounce but if even Reagan would not do so (not from PR concerns but from affinity for the policies) then who will? No one we’ve seen except perhaps Ron Paul and even he stops short of exorcism as a solution. It might be easier for folks who get elected for a living to speak the simple truth that our entitlements are unjust and unConstitutional when it is more obvious that they are unworkable and unbearable. Any reduction in Social Security funding hastens this day, I am therefore in favor of the payroll tax cut extension. I am for its expansion. But everyone who traffics in greenbacks should fear, even if they do not oppose, its expiration.

Another inversion of our stereotypical positions is this pernicious “sunset clause” tripping us again. Back when the payroll tax cut was passed as part of the stimulus legislation the opposition (though meager) was from the Democrats and from the Left. This was a threat to the Social Security system, clearly. The only way it was palatable was if, like with the insane and devastating income tax cuts of the hellish Bush, the cut was temporary. VERY temporary, as in some point after the recession is clearly over. December 31st ’11 seemed about right. Now all gaze on the New Year with horror absent the extension. Why? Because without ammendment, current law would require every employer in the nation to withhold 6.2% for FICA rather than the 4.2% they have been doing, also they are on the hook for their own half of the Social Security “premium” but we always figure the draw on BOTH as dunning the employee, because it does. So what we are really looking for January 1st (which has now been moved to March 1st) is an immediate tax hike. If you pay only payroll taxes on net (as half of taxpayers do) this will amount to an instant increase in your tax burden of 50%. You are going from an 8.2% rate to 12.2%. Horror, indeed.

But this is a tiny horror compared to the Mother of All Sunsets, which will see the end of the Bush tax rates. Recall, these were to expire at the end of 2010. This would have meant, likewise, a near 50% tax hike for many payers and a 100% increase, if you want to look at it that way, for those many low earners who paid NO income taxes under the Bush rates but some 15% or so under the pre-Bush terms. In any case EVERYONE’S income taxes would go up substantially, materially and irrevocably since the sunset clause is part of current law requiring Congressional approval and a Presidential signature for any alteration. That is now a crisis scheduled for December 31st 2012.

Does that sound familiar? It is to that date that all the bigs claim they want the payroll tax sunset removed. Yes, even for Reid and Obama, the two-month timetable was only a stopgap. They also claim to want the full year but this kind of reverse-flip play is commendable when exercised by Democrats, so we commend them That doesn’t change the fact that now we are scheduled for a double-sunset; come this time next year we will be facing de jur tax increases of a truly mind-boggling size and suddenness; for the hundredaire as much as the millionaire. But surely by that time this recession will be over. Growth will be around 8%. Unemployment with a five-handle and we’ll still have 3% bonds. So, come on 2012!

If only we can get through a couple months. This is in question because, although media types guffawed at Boner’s complaint that the two-month extension is not even practically doable, that was not the Speaker’s contention. Rather he was repeating public statements from experts in the payroll industry. But what do they know? They say that five-odd working days, at the height of the vacation season, is not enough time to re-write and then test the software to keep the withholding from being withheld. A year would have been possible since they could continue on with today’s practice. The haples Eric Cantor’s counter-offer of a 3 month extension was also more pragmatic for the check-writers, since a quarter is at least a timeframe comprehendable to business actions. But no. The President has got what he asked for. And whatever the result we are all going to be back again in 64 days. Happy, merry. Joyous, prosperous.

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