Many Time-limited Tax Breaks Never Die
The only road to fiscal stimulus is through the tax code
December 2, 2011
They should, but only because the political system seems unwilling to consider better options.
The U.S. economy remains vulnerable, and with new spending off the table, the only road to fiscal stimulus is through the tax code.
But a $250 billion payroll tax holiday is a middling choice. Yes, rolling back a tax cut worth $1,000 to a typical family would be a terrible idea right now. And the expanded version would put an additional $500 in workers' pockets on average. Some Wall Street economists think economic growth would slow by a full percentage point if the tax break is allowed to expire.
Yet, because it is so badly targeted, many relatively high-income workers—who are more likely to save rather than spend some of this windfall—would benefit. And if the idea is to boost the economy by increasing demand for goods and services, giving more money to savers isn't helpful.
The Democrats' proposal also would cut Social Security taxes for employers, on the theory this will encourage more hiring. But this was tried in the Carter administration and only about 6 percent of firms that knew about the law said it prompted them to boost payrolls. And some businesses surely got a big tax windfall for hiring they would have done anyway.
Finally, keep in mind that a major cut in payroll taxes reduces funding for Social Security—a program already facing a significant long-term shortfall. Supporters of the payroll tax break insist the Social Security Trust fund would be made whole through transfers from the general fund.
But the government is running a $1.4 trillion deficit, so there are no general funds to fill this hole. In effect, Congress would still have to borrow more money to make up the shortfall—and do so in a way that will only further damage Social Security's credibility.
Finally, while the payroll tax holiday is supposed to be only temporary, many time-limited tax breaks never die. And this one will be especially tough to kill.
President Obama had a better idea early in his administration—the Making Work Pay Tax Credit. It was better targeted and probably generated a much bigger employment bang for the buck. But it was never very popular politically and thus was replaced with the higher-profile payroll tax cut.
Still, for all its flaws, extending the payroll tax cut is better than nothing. It is a sad commentary on the state of our politics that better than nothing is the best we can do. But it is.