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The budget math of the payroll tax extension

The details of the payroll tax reduction, the chances it’ll be extended and how it’ll be paid for.

Adriene Hill: Many say the budget fight is more politics than policy, but there's another battle coming sooner. That's over an extension of the payroll tax holiday; it's set to expire at the end of February.

For more, we go to Fortune Magazine's Allan Sloan. Good morning Allan.

Allan Sloan: Good morning, Adriene.

Hill: So what is going to happen here?

Sloan: Well, there's going to be a whole lot more yelling and screaming and threatening and posturing, and then at the last minute, they'll extend the tax holiday five seconds before they have to.

Hill: Which gives us lots to write about, I guess.

Sloan: Well, that's the bright side.

Hill: How are they going to pay for this extension?

Sloan: In some sort of nonsensical way that makes no sense to anybody outside of Washington who doesn't speak budget math. Now, the current holiday, you'll be glad to know -- the one that expires at the end of the month -- was paid for by increasing the fees that Fannie Mae and Freddie Mac are supposed to charge on new mortgages beginning later this year.

Hill: What do these fees that Freddie and Fannie are paying have to do with Social Security?

Sloan: Well they have nothing to do with Social Security. Except that Social Security is part of the government, right?

Hill: Right.

Sloan: Fannie and Freddie are part of the government.

Hill: OK.

Sloan: The Congressional Budget Office did a calculation that of all these fees to Fannie and Freddie are the same thing as having $35 billion on hand now. The Social Security holiday for the two months cost $35 billion. So $35 billion left from Social Security, $35 billion is coming into Fannie and Freddie, and it balances. I think even people who are not budget geeks are supposed to understand this, though I'm not sure why.

Hill: I think my head has exploded with this budget math.

Sloan: Well, it could be worse. I could have given you the real version instead of the simplified version, and if you really want an explosion, I'll be glad explain that all to you offline.

Hill: Fortune Magazine's Allan Sloan. Thanks.

Sloan: You're welcome, Adriene.

About the author

Adriene Hill is the senior multimedia reporter for LearningCurve.

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