December 17, 2011
Extending the payroll tax cut
Currently there is a congressional debate on whether to extend the payroll tax cut on Social Security. The Republican party, which wants to extend the Bush era tax cuts on the rich, ridiculously argues that those cuts would pay for themselves and do not require expenditure offsets. But it argues the reverse in the case of payroll tax cuts, requiring that the cuts, which benefit largely the middle class, be paid for by cuts in expenditure elsewhere. Their devotion to serving the interests of only the rich has never been so glaringly exposed.
I initially opposed the cuts in the payroll tax for three reasons. 1) If the economy needed to be stimulated, I preferred the government sending everyone earning below a fixed amount a check for the average amount of the cut, similar to what George W. Bush did. I felt that the effects of a payroll tax cut would be too subtle. 2) Because the tax is a fixed fraction of income up to a certain limit, the cut gives more back to higher income earners than lower ones. 3) It would cause a deficit in the Social Security trust fund that would be used by opponents to undermine the Social Security program.
It turns out that I was wrong on the third point. The legislation that cut the Social Security tax also required the government to make up the losses to the trust fund from general tax revenues. This is still problematic because it further breaks down the wall between the trust fund and general revenues and drags Social Security into budget debates by enabling opponents to claim that it is adding to the budget deficit. But at least on paper, the trust fund revenues are not affected.