Cut the Payroll Tax
November 30, 2011
For more than a generation, the Republican party has stood for cutting tax rates and opposing increased tax rates. That commitment has, on balance, well served the causes of limited government, economic growth, and conservative political success. (We are not among those who imagine that we would somehow be a freer society if we still had 70 percent tax rates.)
In recent weeks, however, some Republicans have put themselves in the odd position of opposing a cut in tax rates that Democrats are proposing. They risk eroding the party’s traditional advantage on taxes, and for no good reason. Sen. Mitch McConnell, we are happy to note, said yesterday that more and more Republicans are coming around, and he expects the payroll-tax relief to be extended.
In late 2010, the parties reached a deal to extend the Bush tax cuts for another two years. The deal also cut the payroll tax by two points for one year. Democrats want to extend that tax cut, but Republicans have resisted. They raise three objections.
The first is that temporary tax cuts are less beneficial to the economy than permanent ones, because they have a more limited effect on people’s incentives. This is true. But the income-tax reductions of the Bush administration came with an expiration date; their extension came with another; and Republicans have rightly sought to make them more effective by increasing their duration rather than by opposing them altogether. This objection offers no reason for refusing to do the same in the case of the payroll-tax reduction.
The second objection is that the payroll tax, unlike the income tax, funds Social Security and that reducing it therefore threatens that program. Republicans who make this argument have allowed themselves to be ensnared in the accounting fictions of the federal government. Almost any large tax cut — of income taxes or payroll taxes — reduces revenues and therefore reduces the government’s ability to spend money while staying solvent. The argument has also become weak even as a matter of accounting. For the foreseeable future, Social Security will cost the federal government more than the payroll taxes it collects, and income taxes and debt finance will have to cover the rest. The costs of Social Security are not a valid argument against payroll-tax cuts in particular.
The third objection is that the payroll-tax cut has been ineffective at creating jobs. Here again holdout Republicans have a double standard, demanding that this tax cut pass a rigorous empirical test that they never apply to other tax cuts. It stands to reason that the tax cut makes hiring more attractive to employers — only marginally more attractive, to be sure, but it is on the margin that we seek beneficial effects from improvements to tax policy. And there may be ways to make the tax cut more effective, such as applying it to the employer’s share of the payroll tax rather than the employee’s.
Republicans should by all means continue to oppose legislative packages such as the one proposed by Senate majority leader Harry Reid, which couples a temporary payroll-tax cut with a permanent increase in income taxes on high earners. But they should oppose them for the right reasons: because there are better ways for the federal government to balance the books, not because the payroll tax is sacrosanct.
The payroll tax reduces both wages and employment. When Democrats propose cutting it, the right response is: That’s a nice start.