The GOP Fumbles the Payroll Tax Cut
The Republicans have finally found a tax increase many of them can get behind. Unfortunately it's the first middle class tax increase in decades. Make no mistake, failure to renew the payroll tax cut would mean a significant tax increase.
If nothing is done, then starting next month everybody who works for a living will have an extra 2% of their pay deducted from each and every paycheck, and everybody will surely notice that.
Someone with a modest salary of $30,000 will lose $50 per month and someone making $60,000 will take home $100 less each month. These are not trivial amounts. The consequences to the GOP will be catastrophic, especially when it still insists on tax cuts for the wealthy.
It is also deliciously ironic that many Republicans are now fighting against something that looks a little bit like the George W. Bush 2005 Social Security privatization plan with the libertarian twist (added by "Kenyan socialist" Obama) in which workers are allowed to take the same portion of their Social Security tax as under the Bush plan and either invest it in their own pension plan or use it in any other way they want (the Bush plan would not allow the latter option).
Opposition to the payroll tax cut extension is not only bad politics but also bad policy. Not only do Republican objections reveal astonishing double standards, but they are also wrong, and most of them are not very serious.
The only serious objection is that the extension would further increase the already huge budget deficit. Of course, the deficits never stopped Republicans from pushing their own tax cuts, but at least this is not a frivolous argument, even if not entirely sincere (the budget impact is over 3% of the federal budget, i.e. just a bit greater than the combined budget of the three departments that Gov. Perry so famously wants to abolish).
However the biggest problem right now is not the deficit but the economic crisis. Ending the crisis is a much higher priority than reducing the deficit. Incidentally, the impact of the crisis on tax receipts is about four times greater than the revenue that the government will forego if the tax cut in question is extended.
Another version of this objection is that the Social Security tax cut is not offset with spending cuts. Did the Republicans ever insist that their tax cuts could not go into effect unless they are offset with budget cuts? More importantly, spending cuts would offset not only the tax cut but also its stimulating effect on the economy and thus defeat its very purpose.
Many Republicans argue that payroll tax cuts do not create jobs. Once again, do the conservatives have rigorous proof that each and every tax cut enacted by Republicans created jobs? Of course, the objection is blatantly untrue. Workers mostly use their extra income due to the payroll tax cut in two ways. They use the money to deleverage themselves. That's good since household debt holds the economy down, and full recovery will not start until it is reduced a lot further. And they use the money to increase consumption. That's great since low consumer demand is precisely what keeps the economy in the moribund state right now and prevents hiring more workers.
Consumption and debt reduction are right now more desirable than savings and investments, and that makes payroll tax cuts a lot more effective than tax cuts on high earners who would use their windfall quite differently than people with moderate incomes.
Another variation of this objection focuses not on the content of the tax cut but rather on its temporary nature, which allegedly prevents it from being effective. OK, then what exactly were Republicans trying to accomplish by temporarily abolishing the estate tax for just one year? The theory that only permanent tax cuts stimulate the desired taxpayers' behavior is quite popular among conservatives, but it is just an ideological assertion, not a proven fact.
There's simply not much meaningful distinction between "permanent" and "temporary" tax cuts. Reagan's top marginal tax rate of 28% was officially "permanent" and lasted for all of three years. The "temporary" Bush tax cuts were enacted over a decade ago and are still with us. In fact the longest lasting tax cut ever is the temporary "one year only" AMT patch. (This nicely demonstrates the fact that in budget matters the word "temporary" is often not a status qualifier but a shorthand for "Yo, CBO! You must pretend that the budget busting spending increases and/or tax cuts we just passed never happened").
But it is not enough merely for a clear distinction between permanent and temporary tax cuts to exist - the taxpayers need to be aware of them! And here we have a problem. Ordinary Americans do not follow politics very closely, and one of the best informed and politically active demographics happens to be the elderly who do not work and thus do not get any payroll tax cut.
Among people who actually enjoy this tax cut, roughly half never or almost never vote, and either a very significant percentage cannot name the House Speaker and the Senate Majority Leader, cannot name their own Representative, cannot identify their own income tax bracket etc. It is a safe bet that a majority of them do not know that the Social Security tax cut is temporary.
Inasmuch as people are going to be aware of the fight over extending the payroll tax cut, it is necessary to remember that we are in the first half of the all important Christmas shopping season and people are trying to figure out how much they can afford to spend and what credit card balances they can cope with come January. Telling them now that starting in January an extra 2% of their pay will be deducted from their paychecks could seriously reduce sales and damage the economic recovery. Would not doing so be, to borrow a word from Rick Perry, really be "treasonous"?