Earlier this week, Senate Republicans rolled out their proposal for financing an extension of the Social Security payroll tax cut scheduled to expire at the end of December. Disappointingly, the conservative counteroffer is to pay for this job creation measure by cutting federal employees' jobs and wages. The "pay-for" proposed by Senate Democrats -- a 3.25 percent surtax on the 1-in-500 households earning over $1 million -- for an expansion of the payroll tax cut is anathema to conservatives; Senate Republicans have already filibustered a litany of job-creation proposals that would be financed by varying millionaire surtaxes. Last night, the Senate Republicans filibustered yet another such jobs package -- both the proposed extension and expansion were rejected in the Senate.
The Senate Republican proposal would limit federal agencies to hiring only one replacement employee for every three full-time employees leaving the agency until employment has fallen by 10 percent. This would result in roughly 280,000 job losses -- ironic, given that the purpose of the payroll tax cut is to create jobs. Someone should remind the GOP that the purpose of a pay-for is to offset the cost of a policy, not its impact.
Laying off hundreds of thousands of federal workers is terrible policy for reasons beyond causing job loss during a jobs crisis. First, it ignores the need to keep up with a growing population. These civil service jobs deemed unnecessary by Senate Republicans include one out of 10 federal judges, FBI agents, Veterans Affairs doctors, National Institutes of Health cancer researchers, food safety inspectors, and air traffic controllers, to name just a few.
Second, haphazardly cutting certain agencies' payroll would in many cases actually increase the budget deficit. Fewer Internal Revenue Service auditors would mean less tax enforcement and revenue. (In fiscal year 2010, 22,710 full-time IRS enforcement officers brought in $58 billion -- an average of over $2.5 million per employee.) Fewer Medicare fraud investigators would mean more erroneous payments and unprosecuted fraudulent claims. Fewer employees at the Security and Exchange Commission would mean less enforcement of insider trading laws and greater incidences of financial fraud. As Brad Plumber points out, the SEC lost 10 percent of its staff between 2005 and 2007, even as the financial system's rise in complexity would have justified a larger workforce. Small wonder the agency was unable to adequately identify financial institutions at risk of collapse or uncover Bernard Madoff's multi-billion-dollar Ponzi scheme.
The Republican proposal would also freeze federal employees' pay through 2015, extending a two-year freeze by another three years. Based on the Congressional Budget Office's economic projections that would mean an 8.3 percent real wage cut for all federal employees over five years. The bill also symbolically proposed barring millionaires from receiving unemployment insurance and food stamps, and, less symbolically, would raise Medicare premiums for millionaires. (These mandatory savings account for only four percent of the proposed spending cut -- the real money comes at the expense of federal workers, not millionaires.)
The proposal would book "savings" for this reduction in federal payroll be downwardly revising the discretionary spending caps for the second phase of the Budget Control Act (i.e., the debt ceiling deal) by $222 billion. If Congress allows the automatic sequestration cut to be triggered for 2013, the $109 billion cut for fiscal 2013 would come from this lower spending baseline. The unbalanced, spending-cuts-only approach to deficit reduction set in place by the Budget Control Act would be made even more lopsided.
The Senate Democratic proposal would raise $265 billion for an expanded payroll tax cut, leading to accelerated GDP growth going into 2012. Employees' payroll tax rates would fall from 4.2 percent in 2011 to 3.1 percent in 2012 (instead of reverting to 6.2 percent as scheduled) and businesses would see reduced payroll tax rates for the first $5 million in payroll and limited expansions of payroll. The Senate Republican proposal would finance a $120 billion extension of the existing two percentage point payroll tax cut, which would leave the GDP accounts unchanged relative to current budget policy, with $231 billion in spending cuts. This would create an unnecessary drag on economic growth for two reasons. First, it would cut spending by significantly more than needed to offset the cost of the tax cuts. Second, while permanent tax increases on upper-income houses have relatively little impact on near-term economic activity, government spending cuts have a very adverse impact on growth and employment during periods of depressed economic activity.
The dog and pony show that was the super committee made clear that the 112th Congress is incapable of breaching a deep ideological rift over taxation and how to address the long-term budget deficit. If Democrats and Republicans can only agree that temporarily increasing middle-class paychecks is good for a weak economy, there is a third option for Congress: it should simply pass the tax cut without any offsets. After all, Congress didn't pay for last year's $858 billion tax deal that extended the Bush tax cuts for high-earners (tax cuts averaging $22,000 for households making more than $200,000). So why must we now insist on paying for an extension of a significantly cheaper middle-class tax cut? The only compelling reason to negotiate a payroll tax cut pay-for is to set the precedent that the Bush-era tax cuts only get extended if fully paid for. And voters didn't seem to like the $4.5 trillion pay-for proposed in the House Republican budget.