Your points are well taken. Unfortunately, with the weak economy, any decreases in disposable income will hurt the economy by reducing consumption. And, the political reality is that there is no SS trust fund and there is no trust that our government would use the new taxes to improve the precarious position of SS. The money will be squandered as it usually is.
Consumption does not drive the economy. That is a fallacy that has been rammed down our throats since the Great Depression. Investment creates economic growth -- not consumption.
Humans are born consumers. There will never be a shortage of consumption as long as people are able to work to earn the means to consume. Our problem now is not one of consumption -- it is one of production.
The labor force has decreased by millions. Those millions are spending less. Provide them with the opportunity to work and their consumption will increase.
But to do that, it is production that must be encouraged. Production is not encouraged by a lousy 2 percentage point drop in the employee's contribution to Social Security. The entrepreneur doesn't give a crap about that.
More consumption does not encourage more investment in production when the government is threatening to tax and regulate the hell out of business. The 19th century British economist, John Stuart Mill put it this way:
What supports and employs productive labor, is the capital expended in setting it to work, and not the demand of purchasers for the produce of the labour when completed. Demand for commodities is not demand for labour.
Mill was explaining that the decision to consume and the decision to invest are two separate processes. As I said, humans will always consume all they can. Entrepreneurs, however, will not invest in expanding production if all they can see is a government hell-bent on taxing the crap out of the profits which would result.
It's for this reason that I think the Social Security tax cut was economic foolishness.
Actually, even if you did believe consumption drives the economy, the SS tax cut was worthless.
If you want people to spend extra money, you have to convince them that they have “free money”. For example, you send them a refund check — it is their money, but they think it is a gift. Or, you give them a big stimulus check.
The SS tax cut was like $4 or $8 a week, that appeared in a paycheck that they may not have even known the value of down to the dollar. They put that check in their checking account, and it was lost. That $4 was in the noise — less than the variations in the interest that they pay on their credit cards, and which itself gives more “consumption power”.