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The Payroll Tax Debate Was Predictable. Which Makes Today’s Gridlock Even Worse.

2 min readBy: Scott Hodge

With only a few days left in 2011, Washington is gridlocked over whether or not to extend the one-year payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. holiday passed in the waning moments of 2010. To say that this debate was predicable is an understatement. I am by no means a political prognosticator, but in a blog I posted here on December 30, 2010, I wrote:

I expect 2011 to end with a fight over what do about the scheduled expiration of the temporary cut in the payroll taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. . I think we will see a replay of this year’s debate over allowing a “tax hike on working families.” This is the trouble with these temporary tax measures; not only do they cause taxpayers uncertainty, but they make taxpayers political footballs. Moreover, the payroll tax cut issue is wrapped up in the larger issue of funding the Social Security trust fund and that adds another dimension to the whole debate.

Lastly, we should remember that the 2011 tax debate is a prelude to the 2012 presidential election which begins in one year. Both sides will be positioning themselves for that debate, and let’s not forget that all of the Bush era tax provisions expire at the end of 2012. But by 2012, they will no longer be the Bush-era tax cuts, they will be labeled the Obama compromise plan. Although Obama has been against “tax cuts for the rich” can he really argue against extending a plan that he signed into law? Stay tuned.

Washington has put the entire U.S. tax code on a year-to-year lease and could shorten that to a month-to-month lease if the House goes along with the Senate’s plan to extend the holiday to February of next year.

The payroll tax holiday was terrible tax policy to begin with and this debate has made it worse. For the $200-plus billion that it will cost to reduce the payroll tax for one year and have no impact on the economy, lawmakers could make a deep cut the 35 percent corporate tax rate. Not only would this make the U.S. more competitive but it would improve America’s long-term economic growth. But neither of those goals seem to be on Washington’s political agenda right now.