Should the payroll tax cuts be extended? >
An Economic Loser in the Long Run
Tax holiday adds uncertainty to an already exceptionally uncertain tax environment
December 2, 2011
About William McBride:
William McBride is an economist at the Tax Foundation. He holds a Ph.D. in economics from George Mason University, where his dissertation involved using agent-based modeling and simulation to analyze the effect of various banking regimes, including free banking, on asset prices.
There has been more than the usual amount of rhetoric, noise, and confusion regarding the Senate Democrats' bill that pairs a payroll tax holiday with a permanent surtax on millionaires. This bill would make the tax code more complicated, more unstable from year to year, and more redistributive--all damaging to long-term economic growth.
It is essentially the 2012 version of cash for clunkers. Economists claim that the payroll tax holiday would stimulate consumption spending, and it very well might in the short term. But just as cash for clunkers merely shifted car sales from the future into the present, this too will merely shift future consumption into 2012. We would basically be borrowing from ourselves and future generations.
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This redistribution would occur not only across time and generations but also across income groups. The payroll holiday would cut taxes for one year on wages up to $106,800, while the surtax would be a permanent tax increase on millionaires.
The effect would be to increase the progressivity of our tax code, meaning high-income earners would pay an even greater share than they currently do. As it is, the top 1 percent of filers pay more in income taxes than the bottom 90 percent combined, giving us the most progressive income tax system in the industrialized world, according to the OECD.
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There are real economic costs associated with such a progressive tax system. First, high-income earners do a great deal of the saving, investing, entrepreneurship, and high-productivity labor necessary for economic growth. Second, the U.S. is unique in that most business income is actually taxed through the personal code, and a large share of that accrues to high-income earners--about 39 percent to millionaires, as does 18 percent of all small business income.
Lastly, economic growth is suffering right now in large part due to various uncertainties, including an exceptionally uncertain tax environment. Our tax code is in constant flux, which prevents long-term economic planning. There are some 65 so-called tax extenders due to expire at the end of this year, and the Bush-Obama tax cuts are due to expire next year, meaning the majority of our tax code is a perpetual political football. This bill only adds to these uncertainties.
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- Other Arguments
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#1290199
No — Washington hopes to borrow time, with the nation's future as collateral
DAVID SCHWEIKERT, U.S. Representative
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#2238185
Yes — This should expose the fiction that Social Security benefits are fully backed by payroll-tax contributions
VERONIQUE DE RUGY, Senior Research Fellow at the Mercatus Center at George Mason University
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#390194
No — Cutting payroll taxes should be done within the context of long-run fiscal reforms
CHRIS EDWARDS, Economist at the Cato Institute
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#5111232
Yes — Congress should enact a range of policies that expand the payroll tax cuts
CHUCK MARR, Director of Federal Tax Policy at the Center on Budget and Policy Priorities
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#653189
Yes — The only road to fiscal stimulus is through the tax code
HOWARD GLECKMAN, Resident Fellow at Urban-Brookings Tax Policy Center
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#7109258
Yes — The payroll tax cut will help drive economic growth
HEATHER BOUSHEY, Senior Economist at the Center for American Progress
Reader Comments Read all comments (1)
Philip Dittmer of IN 3:53PM December 02, 2011