Should We Extend the Payroll Tax Cut?


This post is by Mark Thoma from Economist's View


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Jared Bernstein says we should renew the payroll tax cut:


When You’re Trying to Decide if We Need to Renew the Payroll Tax Break, Picture
This. by Jared Bernstein
: It’s just a slide…in both senses of the word…of
the real earnings—pretax, which is important—of middle-wage workers: blue collar
workers in manufacturing and non-managers in services, adjusted for inflation. And it’s not inflation holding back these wage rates—it’s the weak economy. This series starts in 1964, and in nominal terms, it’s never grown more slowly
than it has this year.



Source: BLS

So it is to his great credit that the President proposed another round of the
payroll tax break, or something like it, as part of his opening bid for the
cliff negotiations… With unemployment still way too high, we need to continue to support workers’
paychecks and temporarily offset some of the fiscal contraction from the tax
increases and spending cuts that are likely to come out of the cliff
negotiations.

I know that adding a spending program to a deficit reduction package may sound
counterintuitive, but it’s really countercyclical. And by dint of being
temporary—we could even write in the legislation that it expires when
unemployment goes (and stays) below 7%–it won’t affect the

medium-term deficit
. …

I think the payroll tax should be extended, but

as I noted when this first came up
, I'd prefer the "optics" to be different:

I see the payroll tax reduction as potentially troublesome… Though the
revenue the Social Security system loses due to the tax cut will be backfilled
from general revenues, the worry is that the tax cut will not expire as
scheduled — temporary tax cuts have a way of turning permanent. That's
especially true in this case since labor markets are very unlikely to recover
within the next year and it will be easy to argue against the scheduled "tax
increase" for workers. In fact, it will never be a good time to increase taxes
on workers and if the tax cut is extended once, as it's likely to be, it will be
hard to ever increase it back to where it was. That endangers Social Security
funding — relying on general revenue transfers sets the system up for cuts down
the road — and for that reason I would have preferred that this be enacted in a
way that produces the same outcome, but has different political optics. That is,
leave the payroll tax at 6% on the books and keep sending the money to Social
Security, and fund a 2% tax "rebate" out of general revenues. The rebate would
come, technically, as a payment from general revenues rather than through a cut
in the payroll tax, but in the end the effect would be identical. But the
technicality is important since it preserves the existing funding mechanism for
Social Security even if the taxes are permanently extended.

[On the connection between the payroll tax and support for Social Security,
see

here
. As Bruce Bartlett notes while expressing similar worries, "Arch
Social Security hater Peter Ferrara once told me that funding it with general
revenues was part of his plan to destroy it by converting Social Security into a
welfare program, rather than an earned benefit. He was right."]

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