The Coming Payroll Tax Role Reversal

By :: August 18th, 2011

In a couple of weeks, President Obama will ask Congress to extend this year’s payroll tax cut. It will surely become a classic Washington double-reverse rhetorical moment.

I can’t wait to hear Obama lift some of House Speaker John Boehner’s (R-OH) best lines about the folly of raising taxes in the midst of an economic slump. And, of course, we’ll also get to hear Boehner do an Obama and warn against the dangers of recklessly extending temporary tax cuts. If the stakes weren’t so high, it would all be great fun.  

Confused? Don’t be. Just take what each side said last winter as Obama and Congress battled over what to do about the expiring 2001 and 2003 tax cuts and give the Democrats the Republican talking points and give the Rs the D’s script.

Just as the GOP insisted that failing to extend the Bush-era tax cuts would amount to a tax increase, Obama will do the same with the payroll tax. Republicans, by contrast, will argue that allowing the payroll levy to expire is not a tax increase at all since it was always scheduled to come to an end. What would they all do without their ever-flexible baselines?

There are some serious policy issues, of course. For instance, do we want to continue to reduce what was supposed to be a dedicated revenue stream for Social Security? And, so far, we know very little about what households have done with the payroll tax reduction they got this year—averaging about $1,000-per-worker. How much of it did people spend? Important questions but, trust me, hardly anyone will care about the answers.      

For the most part, the payroll tax debate will be nothing more than naked politics. Democrats will bring the idea up in the Senate as often as they can, all the better to charge that GOP Senator so-and-so voted twelve times to raise taxes on hard-working American families (RTOHWAF) . Come campaign time, they might even recycle an old Club for Growth ad from last year. You know the one: ominous music, images of closed businesses, female voice-over asking why our senator voted to RTOHWAF.

Democrats, of course, will be able to add their own rhetorical flourish by linking the payroll tax cut to tax hikes on hedge fund managers and oil companies. Republicans, they will say, are interested only in protecting the rich, and not working families.

The Republicans, of course, will play their own version of the same game. They seemingly love all tax cuts, except those proposed by Obama. Does anyone seriously believe they’d oppose the identical payroll tax cut if it came from, say, Mitt Romney or Rick Perry?

And, of course, nine months ago, they had no problem at all extending those temporary tax cuts for a couple of years (and adding more than $800 billion to the deficit). But now, says House Budget Committee chairman Paul Ryan (R-WI), such cuts are “sugar-high economics.”

There is nothing new in all this, of course.  Exactly the same thing happened with climate change, health reform, and a fistful of other issues in recent years. Remember when Democrats preferred regulatory solutions to air pollution and trashed the market-based fixes adopted in the early ‘90s by Republican President George H.W. Bush? Of course, once Obama (reluctantly) embraced the idea of trading rights to pollute, the GOP repudiated the concept. Not that they embrace regulation, of course. Instead, many in the party merely deny the existence of the problem.

Sometimes, as they used to say at the ballpark, you can’t tell the players without a program.     

 

19Comments

  1. Michael Bindner  ::  3:10 pm on August 18th, 2011:

    From what I understand, FICA payers get credit for the full amount of the income earned, with the Trust Fund incurring more debt to offset the lost revenue. Most people save between $10 and $30 per week because of this. There are better ways to stimulate the economy – like a full-on effort to go to Mars or a QE3 sale of GSE assets to the Federal Reserve – which reduces the deficit by the sale, reduces M2 when the Fed writes down the bonds and stimulates the economy when they direct servicers to lower balances and monthly payments. It would also spur a boom in home sales, as those who can afford their current underwater loans trade up to better housing.

  2. foosion  ::  3:32 pm on August 18th, 2011:

    Your attempt at finding equivalence doesn’t work.

    The difference between Obama and the GOP is that he is proposing a temporary extension to help the economy in a difficult period and they are proposing something permanent.

    In other words, one wants counter-cyclical policy, the other wants to cut spending programs that benefit the middle class and reduce taxes on the best off.

    More money for the middle class stimulates the economy – it promotes current spending. More tax cuts for the best off leads to more savings. With yields at record lows, that doesn’t do much.

    The Obama proposals are designed to lead to short term stimulus and long term balance. The GOP is just interested in changing the way the national pie is cut to help the best off.

  3. Ralph H  ::  4:36 pm on August 18th, 2011:

    You correctly point out the hypocracy in each party. Since most posters are liberal and take shots at the GOP (rightfully most times), I will concentrate on Mr Obama.

    He is so inconsistant that it is maddening. First, he campaigns noting how GWB balooned the deficit by giving (with no funding source) Medicare D. In office he adds to the cost by giving those in doughnut $400.

    He also campaigned against tax cuts, and expnded cuts with additional EI Credits. Apparantly tax cuts and credits are OK for your favored group.

    I won’t talk about the stimulus, other than to note very little of it funded real infrastructure projects that would pay off long term in a better, more efficient USA as the bulk were directed toward avoiding layoffs of teachers (really just postponed) or other government officals). Again, not arguing that a stimulus would be good just pointing out that it was political and poorly directed.

    He had a great opportunity with the Simpson-Bowles comittee. He could have gone on 60 minutes and said what a good job the did and that his Treasury guys were preparing legislation. It might not have worked, but it would be a try. With a few charts I believe most people would be convinced that we have to do something about Medicare and maybe SSI. Also, that some tax increases would be needed (along with entileement reform). It would also have been necessary to explain that politicians had overpromised (and not just GWB).

    Instead, in a month and a half, he made the situation worse by extending the tax cuts and upped the ante by adding the payroll tax cut.

    We cruise along until the debt limit. Now we lobby for cuts but of course make those in his remaining term chump change. The main goal is to raise the limit and make sure it is not an issue until 2013.

    Meanwhile, there seems to be no economic plan to increase jobs. If you wanted to increase jobs why not take the Payroll tax cut and put it into some sort of employer incentive to increase staffing? As it is we will have unbelievable pressure to continue, and no new net jobs added.

    We are losing jobs, particularly in industry. I just met with a plant manager who went from 25 people to 7 by eliminating product production by buying and rebranding his sales. He has way fewer problems, pushes the lawsuits on his vendors and is making much more profit. In a nutshell this is one of the reasons we have a structural unemployment problem. The government has to figure out HOW to REVERSE this, by taxes, tarrifs, tort limit or who knows. Neither party will solve it by their pet policies alone.

  4. Vivian Darkbloom  ::  6:31 am on August 19th, 2011:

    Sure, there is hypocrisy here. But, again, Gleckman misses the main point(s). The main objection to the payroll tax cut is that the cut did not affect future social security benefits (and I fully expect this also to be so with respect to any extension of that policy). In other words, taxpayers getting the break don’t suffer any reduction in their earnings credit history. If, as the argument goes, we need to have current fiscal stimulus and offset that by long term spending reductions, there could be no better policy than to reduce earnings credit history along with the current reduction. That is a real hypocrisy. Second, as far as jobs are concerned, almost everyone agrees the cut should rather go to employers.

    And, the biggest hypocrisy is that the current administration does not have the guts to come out and propose a reform package that not only reforms the tax code but also our unaffordable entitlement system, much less pass an annual budget. If they had made a serious effort to do that in first years of this administration rather than add to the problem by adding a huge new entitlement to the already unaffordable ones we’ve got, we wouldn’t be quite in such a mess we’re in and Obama would be on his way to easily winning a second term. The payroll tax cut works only party to offset the $1 trillion or more tax increase to fund the ACA.

  5. Wonkbook: ‘Just depressing beyond words’ « Tax Australia  ::  10:56 am on August 19th, 2011:

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  6. AMTbuff  ::  12:23 pm on August 20th, 2011:

    All proposals are political posturing except those few (Ryan’s and Coburn’s, so far) that overtly break entitlement promises to the non-poor. That step is the essential foundation for fiscal sustainability, and everyone knows it.

  7. A Completely Unofficial Blog About Eric Cantor » Wonkbook: ‘Just depressing beyond words’  ::  5:30 pm on August 20th, 2011:

    […] coming payroll tax fight is a role reversal for Obama, writes Howard Gleckman: “I can’t wait to hear Obama lift some of House Speaker John Boehner’s […]

  8. Michael Bindner  ::  12:57 pm on August 22nd, 2011:

    Not necessarily. The other,very viable option, is more revenue from either higher rates or an expanded base – or higher premiums married with higher base Social Security funded, again, by broadening the base upward (both in terms of getting non-wage income and raising the income cap).

  9. Michael Bindner  ::  1:00 pm on August 22nd, 2011:

    The way to deal with Part D is higher premiums, but to get way with that, higher base Social Security benefits are required – which means both raising the tax base and finding a way to make benefit distribution more redistributive – either by changing bend points or moving to a uniform crediting of the employer contribution (decoupling it from income).

  10. SteveinCH  ::  1:42 pm on August 22nd, 2011:

    Michael,

    I’d encourage you to have a look at the CBO’s long term forecast. It’s hard to sanguine on the tax only solution unless you believe the American public will stand for taxes at double or so current levels.

  11. Is that Boehner we hear? Nope, that would be Obama. | POTUS NEWS  ::  1:17 am on August 24th, 2011:

    […] Add/view comments on this post. […]

  12. thomas  ::  10:07 am on August 26th, 2011:

    What’s not to understand? Democrats give tax cuts to the working class, while Republicans only care about the Filthy Rich.

  13. Madashell999  ::  2:09 pm on August 26th, 2011:

    As usual all of us seem to miss the point, we as a nation have reached the financial point were we must fish or starve to death. Funding fixes for SS and Medicare must be found in multiple ways. First the increase or eliminate the FICA ceiling, add a graduated formula for FICA taxation of dividends and capital gains and then implement best practice benefit payments, provider sacrafice, and include means testing of some benefits. These items will repair the SS and Medicare systems and insure these systems survival and the protection they provide the citizens of the United States.

    The problem is that the Republicans seem to be only interested in political wins not governing our nation. Every Democratic proposal, even when it has typically been accepted or considered good policy by Republicans is called socialist. Every Republican proposal has the system driven so far right it looks like they only want to provide safety net programs to those who do not need them or they are telling the majority of US citizens suffer with it we do not care! I wish that we as citizens would see that politics is the problem not really the national debt or government programs. A shared burden of benefit limitation, tax increases and just good national policies will fix our nations debt and entitlement situation.

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  17. TaxVox » Blog Archive » A Two-Month Payroll Tax Cut is Dumb, So Is How Congress Got There | ZT News Today  ::  6:00 pm on December 21st, 2011:

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