Republicans Should Oppose a Temporary Payroll Tax Cut Extension

As Ezra Klein rightly points out over at Wonkblog, the debate over whether to extend the payroll tax cut is really not about the payroll tax cut. 

Rather, Democrats and Republicans are arguing over the price Democrats are willing to pay and Republicans are willing to accept in order to extend the payroll tax cut for a full year. Republicans want, among other things, the Keystone XL Pipeline and further cuts to discretionary spending. Neither of those things, you’ll notice, is “a payroll tax cut.”

Klein’s assessment is accurate. Republicans, who are all but indifferent to the question of whether the payroll tax should indeed be temporarily extended or not, are using the debate as leverage in their quest to attain a handful of worthwhile policy agenda items.  But the debate really should be over whether a payroll tax cut extension would do more help or harm to our anemic economy.  As Stanford economist John Taylor argues in today’s Wall Street Journal, so long as such tax cuts extensions would be temporary in nature, Republicans should oppose them.

…That such a temporary cut would stimulate the recovery and get employment growing defies common sense.

There is no hard evidence that the temporary payroll tax cut of this year stimulated the economy, and another one for the first two months of next year will obviously do even less. In fact, economic growth declined after this year’s temporary tax cut was implemented, so proponents need to appeal to dubious “things-would-have-been-worse” arguments.

But the policies are worse than doing nothing at all. Rather than stimulate the economy, they hold the economy back by creating policy unpredictability and by distracting Washington from crucial long-term reforms that are key to restoring economic growth and creating jobs.  Indeed, this type of temporary tax change is making the entire tax system unpredictable.

  1. Tommy De Seno
    C

     Taylor seems reasonable to me, but I would like to ask him if “consumer confidence” is really more of a tool for political confidence men than an economic force.

    I’d actually rather learn about the numbers.  Would a payroll tax cut, which is dolled out in weekly or bi-weekly increments, really be expected to increase demand in an economy even if made permanent? 

    If so, why wasn’t 12 months enough?  What amount of months would it take for the increased demand to affect the economy?

    And doesn’t an increase in demand hike prices, negating the additional spending power anyway?

    Does Ricochet have a resdient economist?

  2. The King Prawn
    Tommy De Seno: 

    Does Ricochet have a resdient economist? · Dec 21 at 2:32pm

    King Banaian might count as one.

  3. EThompson

    In the spirit of Rob Long’s infamous reference to “skin in the game” there are many citizens who pay nothing but payroll taxes- no state or federal- yet continue to benefit from publicly funded highways, parks, schools, police and fire support, etc. Are we now to encourage 49% of the country to contribute absolutely nothing?

  4. Aaron Miller
    Diane Ellis, Ed.: …. As Stanford economist John Taylor argues in today’s Wall Street Journal, so long as such tax cuts extensions would be temporary in nature, Republicans should oppose them.

    …That such a temporary cut would stimulate the recovery and get employment growing defies common sense.

    There is no hard evidence that the temporary payroll tax cut of this year stimulated the economy, and another one for the first two months of next year will obviously do even less. In fact, economic growth declined after this year’s temporary tax cut was implemented, so proponents need to appeal to dubious “things-would-have-been-worse” arguments.

    But the policies are worse than doing nothing at all. Rather than stimulate the economy, they hold the economy back by creating policy unpredictability and by distracting Washington from crucial long-term reforms that are key to restoring economic growth and creating jobs.  Indeed, this type of temporary tax change is making the entire tax system unpredictable.

    Agreed. Business owners are still left to wonder which way the wind will blow 6-12 months from now.

  5. Tommy De Seno
    C
    The King Prawn

    Tommy De Seno: 

    Does Ricochet have a resdient economist? · Dec 21 at 2:32pm

    King Banaian might count as one. · Dec 21 at 2:53pm

    Hope he weighs in!

  6. Chris Johnson

    This is a scam.  The best the MSM can do to spin this (and it is working well), is to say, over and over, that “Americans are going to miss that $1,000″ beginning in January and the GOP is responsible (paraphrasing A.P. Stoddard, at The Hill); absolute nonsense.  Even if you take the numbers being thrown about (average cut, $20 per week, for some families), this 2 month nonsense plan, over 8 weeks, amounts to $160.

    Our GOP “leadership” in the congress is incapable of articulating this point.

    This temporary benefit of $20/week for some families is offset by approximately $17 every month, essentially forever, in the new fees in the bill that (in theory) go to Fannie and Freddie, for every new mortgage over $150,000, backed by them.  This is a tax increase, and redistribution of wealth.  The “fee” lasts forever and only applies to mortgages over a certain amount.  In exchange for 8 weeks of reduced funding for Social Security from folks that only pay FICA, to begin with.

    Even the House bill is absolutely terrible, in many other ways.  The Senate bill, which is what is being discussed here, is stunningly bad.

  7. King Banaian
    C

    What’s that light?

    Tommy’s question is answered by evidence on the effects of temporary versus permanent tax cuts.  Since Friedman, most economists have argued that temporary tax increases or cuts are more paid for (or taken in) as changes to savings than consumption.  That evidence is what Taylor is referring to, an argument he’s made on the WSJ op-ed pages for years.  (The same holds for temporary business taxes.) 

    As Taylor notes, the proper tax incentives should be permanent, pervasive and predictable.  Alas, 2011 tax policy has none of these characteristics, which is why it has failed to appreciably stimulate economic growth.  I hold little hope for a change in 2012; we must wait for 2013.

  8. kesbar

    Seems to me that high Consumer Confidence is the symptom of a good economy, not the cause of one.  This Payroll Tax Cut is so small that it can be nothing more than a plot device. 

  9. Tommy De Seno
    C
    King Banaian: What’s that light?

    Tommy’s question is answered by evidence on the effects of temporary versus permanent tax cuts.  Since Friedman, most economists have argued that temporary tax increases or cuts are more paid for (or taken in) as changes to savings than consumption.  That evidence is what Taylor is referring to, an argument he’s made on the WSJ op-ed pages for years.  (The same holds for temporary business taxes.) 

    As Taylor notes, the proper tax incentives should be permanent, pervasive and predictable.  Alas, 2011 tax policy has none of these characteristics, which is why it has failed to appreciably stimulate economic growth.  I hold little hope for a change in 2012; we must wait for 2013. · Dec 21 at 3:49pm

    Thank you Batman!