President Obama and many Democrats are making the case for an expansion of the payroll tax holiday primarily on the grounds of protecting middle-class families from a tax hike. This is intrinsically problematic even if it seems politically expedient.
The one-year Social Security payroll tax holiday set to expire at the end of December reduced employees’ payroll taxes by 2.0 percentage points, increasing disposable income by $112 billion in 2011 and generating upwards of a million jobs. The Senate is expected to take up an expansion of the tax cut that would provide a 3.1 percentage-point reduction for employees and partially reduce employers’ payroll taxes. The largest component of Obama’s proposed American Jobs Act, the measure would do more for employment in 2012. But framing the argument instead as taxpayer protection digs proponents of progressive job-creation efforts into a deep hole in two ways.
First, if the measure is presented as anti-tax, we could never end the payroll tax reduction since any advocate would then be accused of favoring taxing the middle class! And if we do not end this measure, it eventually will lead to scaling back Social Security, which would deliver a long-sought conservative goal and further exacerbate our already growing retirement insecurity.
Second, presenting the measure as taxpayer protection advances a false narrative. For one thing, it further reinforces the misguided notion that economic policy is about whose tax cuts are better. This is a debate we don’t want to prolong, as its pursuit over the last several decades has been the recipe leading to a shrunken public sector. It also fails to articulate the real imperative behind it: to maintain consumer spending which supports jobs throughout the economy. We are neglecting the crucial narrative that Obama’s policies are pro jobs whereas his opponents’ are not.
Finally, we are failing to distinguish between the two types of tax cuts being offered. Conservatives claim that protecting lower tax rates for the wealthy creates jobs because those folks will work harder and invest with their extra cash. This policy is really not about generating jobs in the near term—trying to lower unemployment substantially in the next year—but, at best (if it is at all true, which I doubt), about more investment and jobs in the long term. In contrast, the payroll tax holiday is about temporarily infusing some spending into the economy which, in turn, keeps people working or adds jobs as families shop and spend, raising demand for goods and services.
Of course, the payroll tax holiday is a second-best approach: job-creation through spending is far more effective. Direct spending on infrastructure or even on government hiring people to perform useful public jobs (as was done by the Works Progress Administration and Civilian Conservation Corps) is more effective in raising demand and generating jobs. Seeing temporary tax cuts put in the category of competing tax cuts rather than that of job-generating efforts makes me want to recant my support for this measure. I understand the urge to find an allegedly effective argument and call out the hypocrisy of promoting tax cuts for the wealthy but not for low-earners and the broad middle class. But right now, this argument we are waging for the payroll tax cut is just digging us into a deeper hole, which is the way Democrats and liberals seem to fight every fight. Please stop digging!