Dec. 10, 2011 – 1:23 p.m.
Political Economy: Snatching Defeat
By John Cranford, CQ Columnist
If this past year has proved anything, it’s that even when Democrats and Republicans agree, they can’t bring themselves to work together. No wonder the public holds Congress in such low regard.
A year ago, lawmakers decided to give American workers a small tax break. It was a mediocre idea at best in the view of many economists — not particularly harmful, but not as beneficial as some other methods of quickly funneling tax dollars into the struggling economy to broadly raise aggregate demand.
But the idea prevailed as part of a broader tax cut plan. Lawmakers voted to lop the ordinary Social Security tax rate paid by workers to 4.2 percent from 6.2 percent on every dollar of their wages up to $106,800. Since January, a minimum-wage worker who puts in 40 hours a week has accumulated roughly $300 extra in take-home pay. A senior manager with a salary well in excess of $100,000 found as much as $2,136 more in her pocket over the past year.
In the aggregate, a simple extension of the current tax cut would put about $120 billion in workers’ hands over the course of the next year, to be spent as they saw fit. For most Americans, that amounts to roughly an extra week’s pay in taxes saved.
This was originally billed as a “temporary tax holiday” — a classic Washington euphemism — yet until late last week it was beginning to look as if it might become permanent. A year ago, many analysts warned that it would prove politically difficult to allow the tax cut to expire and to take money out of workers’ wallets come Jan. 1. Now, though, for better or worse, partisan disputes and gamesmanship threaten to prevent an extension of the tax cut.
Efforts to close the deal have gotten caught up in fights over how to make up for the lost revenue, even though offsets are an economically spurious concern in the short term because any stimulative benefit from this or any tax cut would be damped by cutting spending or raising taxes elsewhere. Lawmakers who insist on offsets are really saying they mostly don’t want to offend their constituents, nothing more.
The tax cut is also tied to the renewal of jobless benefits for workers who have been unemployed for more than half a year — which plausibly has the similar purpose of giving a lift to economic demand. And it is coupled with an annual feint by lawmakers who voted long ago to cap Medicare payments to physicians and have yet to allow that cap to take effect. Regardless of its merits, the latter has relatively little to do with providing an economic boost.
House Republicans are even trying to link approval of a new oil pipeline from Canada to the Gulf of Mexico and other unrelated items to the payroll tax cut, creating for many ordinary Americans an image of unseemly logrolling that has offended congressional observers since the founding of the republic.
Legislating, though, is an acknowledged ugly business. Those who would prefer to keep their hands unsullied should stay away. It would be nice, however, if this debate were more clearly focused on the merits of the payroll tax cut itself.
Not Really a Tax Cut
The economic reality is that it isn’t really a tax cut at all, in a fundamental sense. It might be better viewed as a transfer payment, and in that way it serves an economic purpose very similar to jobless benefits. Tax revenue that is not funneled into the Social Security trust funds will be replaced by income tax receipts from the government’s general fund — which derive from a broader base of taxable income. That transfer comes from those taxed on capital gains, interest earnings and dividends and goes to those who are taxed only on their wages. There is some overlap among these two groups of taxpayers, of course, but in an economic sense, a regressive tax is being replaced by a more progressive tax.
Some Republicans — or maybe many — probably don’t like this transfer. (Some liberals don’t either, because they fear that it undermines the social contract that underlies Social Security, but that’s a different debate.)
Many Republicans also think a continued payroll tax cut wouldn’t provide the economy with a boost, although they say they still support it. GOP Sen.
Political Economy: Snatching Defeat
Most economists tend to disagree, noting that government transfers to those at the lower end of the income scale tend to have a higher “multiplier” than do tax benefits for the well-off, meaning the money is more likely to flow directly into the economy. People who live paycheck to paycheck are more apt to spend a few extra dollars right away on necessities. And the people who produce and sell those necessities will see demand rise and step up production and hiring to meet it. That’s Econ 101.
But economics isn’t the issue here. This is a political fight, and that’s why some worry that the payroll tax cut might not survive. If it doesn’t, the voters will soon enough let us know whether they care.