Congress Figures Out How to Finance a Payroll Tax Cut: Borrow the Money

By :: February 15th, 2012

It looks like Congress is about to assume its default position: In the face of an intractable partisan dispute over how to pay for a government initiative, don’t. If Democrats won’t cut spending, and Republicans refuse to raise anybody’s taxes, there is always the solution they both can agree upon—just borrow the money and increase the deficit.

The matter at hand is the payroll tax, of course. And after months of squabbling, it looks as if Congress is about to extend a “temporary” tax cut for another 10 months. And it will borrow $100 billion to do it. That would be OK if this was a short-term stimulus. But I don’t think it is.

How did we get here? To briefly review the bidding, in late 2010 Congress backed a plan by President Obama cut the employee share of the Social Security payroll tax from 6.2 percent to 4.2 percent for 2011 only.

Just as the tax cut was about to expire, Republicans and Democrats locked themselves in their usual fiscal death grip. But in a nice bit of political jujitsu, Democrats stole the GOP’s best anti-tax rhetoric. Letting the temporary tax cut expire as planned, they thundered, would raise taxes on 160 million working people.

The talking point was wildly successful. Just before they headed home for the winter holidays, Republicans went into duck and cover mode and Congress voted to extend the payroll tax break for two months—without paying for the extension, of course. The theoretically temporary tax cut is due to expire again in a couple of weeks. And until this week, Ds and Rs were rehashing the same old argument. Except for some tea party conservatives, most lawmakers insisted they wanted to extend the payroll tax break, but nobody would budge when it came to paying for it.

On Monday, the House Republican leadership announced it would support a 10-month extension without offsetting spending cuts. Problem solved. Just put another $100 billion on the tab.

This wouldn’t bother me if I thought the payroll tax cut was really going to expire in 10 months. But I don’t.  Given the Democrats' politically successful claim that allowing the tax break to expire was akin to a tax increase, it is hard to imagine them abandoning the provision--or the issue-- anytime soon.

And if Congress can’t agree on how to pay for it now, how will it do so at the end of the year? That’s exactly when lawmakers will be locked in an epic fiscal policy battle over what to do about trillions of dollars of other expiring tax cuts, how to dodge $1.2 trillion in automatic spending reductions that were mandated by Congress’ failed deficit reduction efforts last year, and how to increase the debt limit.

I can imagine the payroll tax extension becoming another version of the Alternative Minimum Tax patch--extended year after year with borrowed money.  To make matters worse, a permanently temporary tax cut further damages the credibility of the Social Security system which the payroll levy is supposed to fund. The government can fill the hole by shifting general fund dollars into the system, but this bit of legerdemain is not going to boost confidence in the retirement program.

Perhaps Congress will find a way to sort out this mess without adding trillions more to the budget deficit. Perhaps it will somehow let the temporary payroll tax cut quietly fade away at year's end. But, somehow, I doubt it.


  1. My bright idea of the day: Take the payroll tax cut and use it to fund personal retirement accounts « The Enterprise Blog  ::  10:22 am on February 15th, 2012:

    […] whatever the economics of a permanent payroll tax cut extension, the politics are favorable. Howard Gleckman of the Tax Policy Center says he “can imagine the payroll tax extension becoming another version of the Alternative […]

  2. Political Cynic  ::  10:51 am on February 15th, 2012:

    My my, I do so love the right. All these “horrifying” examples of “tax cuts” the “increases deficits” and “won’t die”-but NO mention of the LARGEST deficit increasing temporary cut in HISTORY-the Bush Tax cuts-which were PASSED with a specific date of expiration and were ALSO temporary. But the minute anyone suggests letting THOSE expire the right screams “OH MY GOD TAX INCREASE”.

    Hypocrisy at its best. If a tax cut is given to the lower or middle class and is temporary it should “expire or be paid for”. If a tax cut primarily benefits the wealthy, any attempt to let IT expire is a “tax increase that cannot be allowed”

    This sort of intellectual dishonesty is exactly why I have NO respect for conservatives in the US (not that I have much for liberals either-but at least they’re a bit more honest on THIS subject)

    If we were being intellectually honest here, the fact is the AMT, the “doc fix”, the payroll tax AND the Bush Tax cuts should ALL be allowed to expire-or be paid for. But you can’t just pick three while ignoring the largest of these four.

  3. Michael Bindner  ::  11:16 am on February 15th, 2012:

    I suspect that Congress will make a deal sooner, rather than later, on tax reform in exchange for a tax repatriation holiday – probably on the lines of Bowles Simpson. The payroll tax cut is unsustainable long term unless the alternative is deemphasizing the employee contribution and beefing up an uncapped and equally credited employer contribution funded from a consumption tax rather than a payroll tax.

    The appropriate offset for a payroll tax cut is higher income tax rates to reimburse the trust fund as the people who got a break on this levy draw the funds that were borrowed on their behalf.

    The appropriate offset to extending unemployment insurance is to raise unemployment insurance taxes for those firms who laid off emloyees to pad their profiit margins rather than because they were in trouble.

    The appropriate offset to the Medicare doc fix is higher Part B premiums, which will require a higher basic benefit, which will require raising the income cap for the payroll tax, or simply replacing the employer payroll tax and replacing it with an uncapped VAT or VAT-like Net Business Receipts Tax that raises enough revenue to both stabilize funding long term and pay a higher benefit. The employer contribution could then be credited to workers equally, rather than as a match to the employer payroll tax, allowing for a higher benefit for most workers.

    Better staffing on the Hill would have produced these results by now.

  4. The “Sugar Daddies” Daily Quinn « The Daily Quinn  ::  5:57 pm on February 15th, 2012:

    […] figured out how to finance it, […]

  5. INTJ  ::  11:14 am on February 16th, 2012:

    Bottom line:

    Tax receipts in 2000 were $2.05 trillion. Adjusted for inflation (and ignoring the recession), in 2011, that would be roughly $2.64T. Tax receipts actually hit that level in 2007, 4 years early, just before the recession. Actual 2011 tax receipts were around $2.30T, which demonstrates that the Bush tax cuts did not create a revenue shortage that contributed to the deficit, but the recession has, roughly $340 billion annually.

    However, in 2000, the government spent $1.86T ($0.32T of which was Defense). Adjusted for inflation, that would be just $2.39T in 2011 ($0.42T for Defense). What did we actually spend? $3.60T – down from the original $3.9T “budgeted” before the Republicans took over the House – which is an increase of 50% in real dollars, ($0.74 of which was Defense).

    In other words, the recession represents $340 billion of the 2011 budget deficit of $1.3T (26%), 9/11 responses, the Iraq War, and Afghanistan represents another $340 billion (26%), increased spending levels on nondefense items (by both Republican and Democrat presidents, Houses, and Senates) represents $620 billion (48%), while the “Bush tax cuts” have no impact on our current deficit.

    The payroll tax cut, however, cost $110 billion to the Social Security trust fund last year, which will cost us at least an additional $90 billion in compounded interest over the next 20 years, and, if not allowed to expire at all during that period, would ultimately short Social Security – already on shaky financial ground – by $3 trillion or more.

    So while there is hypocrisy on both sides about spending and cutting, on taxes, at least, conservatives are on pretty solid ground.

  6.  ::  10:10 am on August 18th, 2014:

    TaxVox » Blog Archive Congress Figures Out How to Finance a Payroll Tax Cut: Borrow the Money » TaxVox