The payroll tax cut extension debate has flipped the typical Washington paradigm. Democrats want to cut taxes and the GOP is holding out. The reason the GOP is holding out? Well, tax-cuts means reduced revenue and this payroll tax-cut means reduced social security funds. The GOP wants to pay for the tax cut, while the dems wish to just go ahead and go further into debt.
From the GOP leadership:
“Democrats’ refusal to agree to any spending cuts in the conference committee has made it necessary for us to prepare this fallback option to protect small business job creators and ensure taxes don’t go up on middle-class workers,”
This political position has delivered some leverage to the GOP. The dems want to also extend unemployment benefits and alter Medicare.
From the Washington Post:
But Democrats warned that decoupling the payroll tax from the larger legislation could jeopardize efforts to renew the jobless benefits and the fix to the Medicare payment formula.
“It’s completely irresponsible to leave behind nearly 5 million unemployed Americans whose benefits will expire and 47 million seniors and disabled Americans whose access to health care would be jeopardized,” said Rep. Sander Levin, D-Mich., a member of the 20-lawmaker House-Senate negotiating panel.
My thinking is the GOP is trying to turn a troubling political situation into a slightly less troubling situation. They want the tax cuts and they want to pay for them with spending cuts, but when they ask for the spending cuts they deliver the dems some leverage to ask for more spending on unemployment. The GOP leadership figures if it can go ahead and just ask for tax-cuts and the dems will then lose their leverage for extend unemployment benefits and the Medicare fix.
The problem with all this, is that it is completely 100% political. The payroll tax cuts deliver no real economic benefit. This is because the tax-cuts are very temporary. The government just extend the same tax cut in December and they already expire at the end of February. A two month extension is a stop and go policy that confuses people and creates irregularities in the economy. If this was a five year extension it may be worth it. However, we must remember that whatever the amount of the tax-cut it will put an equal hole in the social security trust.
You can look at a video explaining the economics of the issue, here.
Here are some thoughts from CATO Scholar Dan Mitchell:
- The Democrat’s proposal for a one-year payroll tax cut financed by a permanent income tax hike on investors, entrepreneurs, and small business owners would be a big net negative for U.S. job creation and competitiveness.
- A “clean” extension of the payroll tax holiday would modestly improve incentives for work, but the temporary nature of the tax cut substantially weakens pro-growth effects.
- Ideally, the extension of the tax holiday should be financed by reducing the growth of federal spending.
- There are other tax cuts, such as permanent reductions in marginal income tax rates and/or permanent reductions in the double taxation of saving and investment, that would have a better impact on the economy.
- There are other tax cuts, such as expanded credits, deductions, preferences, exemptions, and shelters, that have no positive impact on the economy.
- A payroll tax holiday does not undermine Social Security since the Trust Fund is nothing but a big pile of IOUs.
- The best incremental reform would be a permanent reduction in the payroll tax, with the money channeled to personal retirement accounts. This would lower the tax burden of work while reducing the long-run burden of entitlement spending.
- This discussion of payroll taxes and incremental reform should not distract us from the enormously important issue of genuinely fixing entitlement programs, something that is needed to save America from Greek-style fiscal collapse at some point in the future.
So what does all this mean? Simply stated, there are many other fiscal reforms that are preferable, but a temporary extension of the payroll tax holiday is better than nothing—assuming, of course, it is not poisoned by accompanying class-warfare tax hikes.
Essentially, this entire discussion has gone from a lose-lose to a… well, I guess it didn’t change at all, it is still a lose-lose.