THE BLOG

Undead on Arrival: Why Payroll Tax Cuts Keep Coming Back -- Part 1

09/29/2010 04:41 pm ET | Updated May 25, 2011

The latest jobs bill -- probably the last attempt of the 111th Congress to stimulate job growth before it adjourns -- died in the Senate yesterday. Four Democrats plus Joe Lieberman joined 40 Republicans to filibuster the measure, which would have given a two-year payroll tax holiday to employers who replaced an outsourced job with an American one.

The vote is being painted as cynical electioneering -- evidence a month before the midterms that Republicans would rather rule in job market hell than serve a Democrat agenda for economic heaven, or that Democrats are more interested in demagoguery and scoring political talk points about jobs than actually enacting something to create them. But its real significance may be a little deeper than that.

Granted, the bill was hardly landmark legislation. Its enactment would not have reversed the employment crisis. Few in either party believe it would have made much of a dent in our massive, structural unemployment, which is actually even worse than the headlines make it. It may have been little more than a stalking horse for the looming battle over extending the Bush tax cuts. Even as a political tactic, its defeat may not help either party much in November.

Yet in the long view, the fact that the majority brought it to the floor at all, and that it garnered 53 votes, is part of a decades-long, continuing and apparently accelerating evolution away from the view that payroll taxes are sacrosanct, and towards a foreseeable future in which payroll taxes phase out.

Time was when payroll taxes as the finance mechanism of Social Security were the "third rail" of politics - touch it and you die. But that's not the reason Republicans object to it today. Iowa Republican Chuck Grassley denounced the bill as "tool of political demagoguery," but his objection wasn't that we shouldn't touch payroll taxes; it was that we were only proposing to give employers $1 billion in payroll tax cuts compared to tens of billions in tax increases for top earners when the Bush tax cuts expire. Some progressive critics of the bill also argued that the cuts didn't go far enough to create many jobs.

Could that mean we could reach bi-partisan consensus around tens of billions in payroll tax cuts? Actually, there's a strong case to be made that we could, that eventually, we will, and that even now, we're headed down that road, albeit a little erratically. As Matt Miller wrote earlier this month:

Cutting payroll taxes today would create jobs outside Washington; leaving payroll taxes untouched may help protect some Democrats' jobs inside Washington. As can't be noted often enough, the boomers' retirement will force us to transcend this insanity, since we'll urgently need to boost economic growth even as taxes as a percentage of GDP rise in an aging America. The most promising answer is a kind of grand tax swap, in which we cut taxes on payrolls and corporations, and raise them on dirty energy and consumption. This rethinking is inevitable, even if political reflexes die slowly. The demographic tsunami ahead--the only wave out there that may be bigger than the one Democrats face in November--will wash away today's archaic premises like a cleansing tide."

The recent history of payroll tax cutting and "grand swap" proposals supports Miller's view. There is a long-term trend that seems to be leading us from the old-school taboo, to a creative idea floated by early adapters of both parties, to more mainstream support and finally, in the 111th Congress and the Obama administration, some serious attempts. While yesterday's vote in the Senate indicates rethinking payroll taxes in favor of non-labor taxes isn't yet imminent, there are other signs that it's coming. Demographic and historical forces are pointing towards a future where the tax burden shifts away from employment, which we must incentivize, and towards certain things we must disincentivize, like pollution or energy waste.

Part 2 of this blog summarizes the trend, and the support this idea has gained in the last two decades, especially recently. It remains a less than immediate goal, but it is also an increasingly visible, politically conceivable one towards which many pundits, policy experts, some in power are turning. When we reach it, we will finally be able to create jobs on the same massive scale that we lost them over the last ten years.