It's the (Payroll) Holiday Season

December 02, 2011

U.S. News and World Report has an online debate regarding the payroll tax holiday, and here are a bit of my remarks:

This bill would make the tax code more complicated, more unstable from year to year, and more redistributive - all damaging to long term economic growth.

It is essentially the 2012 version of cash for clunkers.  Economists claim that the payroll tax holiday would stimulate consumption spending, and it very well might in the short term.  But just as cash for clunkers merely shifted car sales from the future into the present, this too will merely shift future consumption into 2012.  We would basically be borrowing from ourselves and future generations.

The bill I'm referring to is the Senate Democrat's bill that combines a payroll tax holiday with a millionaire surtax, which was voted down last night.  Republicans countered with a bill that pairs a more limited payroll tax holiday with a federal employee pay freeze among other measures, none of which nearly pays for the holiday.  That doesn't mean there is a lack of bipartisan support for a payroll tax holiday, rather that politicians can't find a plausible way to pay for it.  That's good; that means the budgeting process is working.

I've argued before that a stand-alone payroll tax holiday is a fairly bad idea as well, because without any other "pay fors", it must be deficit financed.  And I need not remind anyone that the Greek model is not working.

We find ourselves in a logical box: Republicans and Democrats mostly agree that the deficit should come down pronto.  As well, they've revealed in this debate a remarkable consensus that tax cuts are necessary to boost economic growth, and that is top priority.  There is only one way to achieve both these goals: cut spending to pay for tax cuts.  Here's hoping logic prevails. 

Follow William McBride on Twitter @EconoWill

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