The Payroll Tax Cut Debate and the Dog That Didn’t Bark

December 21, 2011

The tax deal negotiated at the end of 2010 extended the 2001-03 “Bush” tax cuts for two years, emergency federal funding of unemployment benefits by one year, and added a new “temporary” one-year reduction in the payroll tax. With expiration looming, the Senate recently passed a two-month extension funded by increases in fees charged by the overly subsidized government-operated housing loans guarantors Fannie Mae and Freddie Mac; the House has rejected that short duration and demanded either something longer or nothing at all. With the Senate gone and the House not budging, someone has to blink or the payroll tax cut is over on December 31.

The payroll tax, which funds the Social Security program, thus dropped from 6.2 percent to 4.2 percent for calendar year 2011. (Employers and employees each pay 6.2 percent; the cut was on the employee side.) The reduction transferred $105 billion out of Social Security, plunging it into the red and increasing federal borrowing to cover the gap. So at a time when most experts think we need trim Social Security benefits and/or raise taxes that fund the program, we’re cutting those taxes. Originally, it was supposed to be just for one year but now of course, we’re debating on extending that indefinitely.

I would expect to see a lot of think tanks concerned about this, particularly liberal ones that are generally very concerned about the solvency of Social Security. They often describe it as an insurance program that we put our money into while working and “get back” when retired, and this narrative is why they generally oppose means-testing benefits as a way to ensure solvency. But instead we get silence on this important point, like Sherlock Holmes’s dog that didn’t bark.

Among those not showing any concern about Social Security solvency or tax cuts funded by borrowing:

  • Center for American Progress urges renewal, discussing how many Americans benefit from the payroll tax cut.
  • Center on Budget and Policy Priorities urges renewal, saying ending the payroll tax holiday would put many Americans into poverty. (The tax cut is about $20 per week per person.)
  • ThinkProgress urges renewal, warning that not extending the payroll tax cut will harm the economy.
  • Citizens for Tax Justice is uncritical of the tax holiday, quibbling only that the “Making Work Pay” credit was not extended.
  • Third Way has, so far as I can tell, been silent on the most recent negotiations but applauded the payroll tax holiday a year ago.

Not all on the left are so mesmerized by the short-term political gains at the expense of longer term policy. The Committee for a Responsible Federal Budget admirably suggests paying for the payroll tax cut with reforms that reduce Social Security spending. The National Committee to Preserve Social Security is also critical.

That our tax code expired after ten years, and now after two years, seemed silly enough. The Senate proposal of a two month extension should have been ridiculed (as it is now being done so, belatedly, by the House). Unemployment insurance is extended annually, the “doc fix” expires in mid-January, and the gas tax nearly expired earlier this year while airline taxes actually did briefly expire. It’d be comical if it wasn’t so serious.

I’m reminded of economist Charles Kindleberger’s work on the Great Depression, when he pinpointed Britain’s fall as an economic power. In June 1930, the Austrian National Bank ran into credit difficulties and sought a loan from the Bank of England, which for centuries had acted as the “lender of last resort” to countries facing liquidity crises. All Britain could offer was US$7 million loan for one week, renewed weekly. That absurd offer signified their weakness, just as us extending our tax system two months at a time signifies ours.

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