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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.

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Comments

Hi. You listed a lot of good reasons why you oppose the reduction of payroll taxes. I fully support this view and stand behind your position!

Posted by social on December 17, 2011 02:28 PM

I think Point 2 is wrong too.

For SS, you pay until you've earned $106,800 and then you don't pay anymore. So on earnings above $106,800 there is no tax which can be cut. Therefore, the tax cut gives back more to lower earners (<$106,800) than higher earners as a % of their total income.

Posted by healthphysicist on December 17, 2011 02:41 PM

The rate is the same for everyone making up to $106,800. Therefore, the 2% cut is worth more in dollars to a person making $100,000 than to a person making $20,000.

And I might point out, that a $100,000 salary, while not in 1% territory, is still well above the median income. Not exactly a 'low earner'.

Posted by Greg Priddy on December 17, 2011 02:59 PM

Yes, in absolute dollars the cut is worth more. But not on a percentage basis. On a percentage basis it's the same for both. Meanwhile, for all of those making over $106,800 the percentage is LOWER. And on an absolute basis it's trivial.

So, if one is concerned about low wage earners, one should support the cut.

Posted by healthphysicist on December 17, 2011 08:30 PM

The percentage is irrelevant as far as I am concerned. I would like the people earning lower incomes to get at least as much, in actual dollar terms, as those in the higher earning group.

Posted by Mano on December 17, 2011 10:40 PM

I partially agree with you, Mano, but I have another objection. The payroll tax cut reinforces the belief, which has been rammed down our throats for decades, that tax cuts are always good for the larger economy. In this respect (as well as the point you make about the cut putting Social Security funding on the political table), Obama is playing straight into the hands of the right-wing. (Whether that is intentional or not is another matter.)

In order to restore fiscal sanity in this country, we must abandon the supply-siders' ridiculous faith in the Laffer Curve, a concept doodled on the back of a napkin that is long past its sell-by date. The proposition that tax cuts stimulate the economy and, counter-intuitively, increase government revenues, made some sense in the early 1960s when top marginal rates exceeded 90%. It is far less convincing now. And the fundamental problem with the Laffer Curve is that you have no way of knowing where you are on the curve. For Republicans, of course, we're always on the high side of the sweet spot, where tax cuts are justified.

The impact of the payroll tax cut is trivial in macro terms. But the impact of the ideas behind it is massive - and negative.

Posted by Richard Frost on December 19, 2011 10:34 PM