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Friday, August 26, 2011

The Payroll Tax Cut: A Luxury?

Rep. Eric Cantor (R-Va) opposes continuing a tax cut. It is not that which was enacted under George W. Bush that disproportionately benefits the top brackets. That tax cut is good, presumably because it supports the growth of jobs. The tax cut opposed by the U.S. House Majority Leader pertains to the payroll tax. Workers’ contributions to social security were cut from 6.2% to 4.2% until the end of December 2011. A spokesman for the Majority Leader argues that if “the goal is job creation, Leader Cantor has long believed that there are better ways to grow the economy and create jobs than temporary payroll tax relief.” However, it could be argued that whereas the tax cuts at the upper income brackets tend to be saved because the wealthy already have the means to purchase what they want, workers tend to spend any extra disposable income precisely because they don’t have the means to buy even all that they need, particularly in the case of families. Moreover, workers would feel the end of a tax cut more than a rich person would.

It does appear that the Republican party’s support of tax cuts hinges on the financial interest of the rich—tax cuts are not created equal. This asymmetry eclipses the party’s ideological goal of smaller government, for otherwise any tax cut would be sought because it would mean less government taking as well as the possibility of starving government spending. Furthermore, the asymmetry trumps a priority on reducing a deficit that was in 2010 over $1 trillion—that’s the annual addition to the U.S. Government’s debt (which was around $14 trillion at the start of 2011). On the heels of S&P downgrading that debt to AA, continuing any tax-cut, even to prop up the economy, is foolhardy. Only a fool disregards tomorrow for today.

It is possible that Freddie Mac and Fannie Mae could have done more for the economy by allowing homeowners in trouble to refinance to the lower interest rates in 2010 and 2011 than would have been lost from ending the tax cuts. If so, it could be that we could do better in lowering deficits while stimulating the economy. Even with some drag on the economy, the numbers on the baby boomers retiring suggests that the social security fund cannot afford the payroll tax cut in 2012. In fact, it could be that the fiscal impacts of government policy are less significant on the overall economy than on the deficits and debt, which are more immediate to the government (being of the government). The obsession on “revenue,” or whether to continue tax cuts, may itself be excessive with respect to economic growth (and even jobs), while the lack of attention to public debt as a priority may be woefully negligent and irresponsible, whether by Congress, the media, or the citizenry itself.

Source:

Jennifer Steinhauer, “For Some in G.O.P., a Tax Cut Not Worth Embracing,” New York Times, August 26, 2011. http://www.nytimes.com/2011/08/26/us/politics/26dems.html