President Obama and many Democrats are making the case for an expansion of the payroll tax holiday primarily on the grounds of protecting middle-class families from a tax hike. This is intrinsically problematic even if it seems politically expedient.
The one-year Social Security payroll tax holiday set to expire at the end of December reduced employees' payroll taxes by 2.0 percentage points, increasing disposable income by $112 billion in 2011 and generating upwards of a million jobs. The Senate is expected to take up an expansion of the tax cut that would provide a 3.1 percentage-point reduction for employees and partially reduce employers' payroll taxes. The largest component of Obama's proposed American Jobs Act, the measure would do more for employment in 2012. But framing the argument instead as taxpayer protection digs proponents of progressive job-creation efforts into a deep hole in two ways.
First, if the measure is presented as anti-tax we could never end the payroll tax reduction since any advocate would then be accused of favoring taxing the middle class! And if we do not end this measure it eventually will lead to scaling back Social Security, which would deliver a long-sought conservative goal and further exacerbate our already growing retirement insecurity.
Second, presenting the measure as taxpayer protection advances a false narrative. For one thing, it further reinforces the misguided notion that economic policy is about whose tax cuts are better. This is a debate we don't want to prolong, as its pursuit over the last several decades has been the recipe leading to a shrunken public sector. It also fails to articulate the real imperative behind it: to maintain consumer spending which supports jobs throughout the economy. We are neglecting the crucial narrative that Obama's policies are pro jobs whereas his opponents' are not.
Finally, we are failing to distinguish between the two types of tax cuts being offered. Conservatives claim that protecting lower tax rates for the wealthy creates jobs because those folks will work harder and invest with their extra cash. This policy is really not about generating jobs in the near term -- trying to lower unemployment substantially in the next year -- but, at best (if it is at all true, which I doubt!), about more investment and jobs in the long term. In contrast, the payroll tax holiday is about temporarily infusing some spending into the economy which, in turn, keeps people working or adds jobs as families shop and spend, raising demand for goods and services.
Of course, the payroll tax holiday is a second-best approach: job-creation through spending is far more effective. Direct spending on infrastructure or even on government hiring people to perform useful public jobs (as was done by the Works Progress Administration and Civilian Conservation Corps) is more effective in raising demand and generating jobs. Seeing temporary tax cuts put in the category of competing tax cuts rather than that of job-generating efforts makes me want to recant my support for this measure. I understand the urge to find an allegedly effective argument and call out the hypocrisy of promoting tax cuts for the wealthy but not for low-earners and the broad middle class. But right now, this argument we are waging for the payroll tax cut is just digging us into a deeper hole, which is the way Democrats and liberals seem to fight every fight. Please stop digging!
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I do agree that laying the ground work for greater understanding of the economic reasons for middle class tax cuts is beneficial. Most folks don't have any idea whether or not tax cuts for the wealthy create jobs. This claim is made falsely (there are circumstances when taxes are extremely high and interest rates are high where this is true, but it is very narrow) constantly by conservatives like it is some sort of trump card to all economic policy discussions is annoying. Further, the media doesn't question it. There is no nuance in any of this, and some is required, but despite any desire for people to learn some of these economic concepts it is not likely to happen because it is not at all interesting to most people. Most truly follow what seems intuitive to them and go from there and I don't think that is going to change.
1. Make revenues match expenditures
Stop pretending there is any trust fund and don't use general revenue funds to hide the cost. Let the full cost be presented in employees paychecks every two weeks. If the rate continues going up, it is only for one reason: the cost is going up.
2. Remove the cap
Let the full burden of SS/Medicare fall on every dollar of payroll. I'm definitely not advocating making the rate progressive, but let's remove the regressivity (because we all know, nobody is paying into a program for future benefit. It's just workers providing a current benefit for retirees. The provision in the future is left up to future lawmakers.)
3. Remove the employer portion
Most economists agree (I think even Paul Krugman, though I've never verified this) that there is really no employer portion. The employer expends funds for labor based on what he gets in return. He doesn't care if he is sending the check to the employee, tax board, or health insurance company. The entity most fooled by this provision (as I sure was intended) is the employee. They think the cost of the program is half of what is actually is. Gee. Who does that help?
We should not be destroying peoples retirement fund (SS, Medicare) and asking them to take early retirements to let more of the younger workers into the work force.
It was tax cuts and bad trade deals that started this cycle.
Undermining even further the most vulnerable in favor of selected payroll workers for short term political gain...... does NOTHING for the long term employment problem that is being ignored.
You believe that income tax rates were raised? Really, I meet payroll every two weeks and I somehow missed that. I guess you are horribly unlucky to be the one that got the increase. Sorry for the sarcasm, but federal income tax rates have not changed under Obama.
Obama needs to stop pretending like he cares about regular Americans, its all Politics, after all him and the Dems have been shouting about the Bush Tax cuts(which he extended by the way and Blamed the Repubs). No more Tax cuts, Time to let all the Obama/Bush Tax cuts to Expire!!.
But heres the Problem: The Repubs don't want to let them Expire and the Dems don't wont to let them all Expire also, so what gives??. NO PARTY IS REALLY SERIOUS ABOUT THE DEFICIT!.
As for the tax holiday, it infuses millions into the economy where it will do the most good, at the lower end. This money will immediately go into creating demand. We are all going to have to move away from the tax cuts for the rich creates jobs meme, it is and has always been a lie. 8 years of Bush tax cuts=no net jobs. We need to return to top rates of 70%(including Capital Gains) and a progressive tax structure. This has been scientifically shown to be the optimum, allowing a vibrant middle class and health corporate profits.
I knew he was either a lightweight or a Manchurian Candidate when he begun the unraveling of SS with this payroll tax holiday.
He has not stopped bending over since.