A Victory, For Now


President Obama has won one, and not in the manner expected. Instead of Democrats caving, House Republicans, goaded by Karl Rove, the Wall Street Journal, Senate Republicans, and others, relented and approved the bill approved by the Senate extending the payroll tax cut, as well as extending unemployment benefits and mandating a presidential decision on the Keystone XL pipeline.

The measure extended the current, reduced, rate of the payroll tax only two months, so controversy will swirl in a couple of months when further action is needed. Meanwhile, the President has gotten what he wanted, but at a price.

When the Bush-era tax cut was extended in 2010, according to Josh Bivens of Salon, unemployment insurance was extended and a payroll tax cut was enacted, while the Make Work Pay tax credit, part of the Recovery Act, was ended. was replaced by a cut in the payroll tax. According to Josh Bivens of Salon, the decrease in the payroll tax in effect supplanted the Make Work Pay tax credit. Bivens explains

It seems obvious why Republicans didn’t like the MWP credit – it was actually well-targeted at low- and moderate-income households and it was a tax cut associated with the Obama administration. So, to grease the wheels of getting more fiscal support into an economy that needed it, the administration acquiesced to this swapping out of the MWP credit for a payroll tax cut. One is surely allowed to be ambivalent about whether this deal should’ve been struck, but it’s awfully hard to criticize the administration’s impulse behind it – they were actually trying to help ameliorate the very real problem of unemployment. And the MWP-for-payroll tax cut swap actually got more money out into the economy, so it wasn’t all bad.


But the payroll tax cut is pretty middling fiscal support in terms of jobs created per dollar it adds to the deficit. It is notably less efficient as a job creator than the MWP credit. It also provides a political hammer to opponents of Social Security who can claim that the cut has depleted the program’s Trust Fund ahead of schedule, requiring cuts in benefits. These opponents are wrong, of course: the legislation that cut the payroll tax also instructed Treasury to credit the Trust Fund for the lost revenue – but since when has being factually wrong defanged a political argument? And who’s to say that the next year of payroll tax cuts will maintain this commitment to hold the Trust Fund whole?


Further, the way the payroll tax cut is being marketed by too many of its Democratic proponents is maddening. Essentially, they sound like Republicans, and tout the simple virtue of the extension as being families having to pay less in taxes, period. How many of us have heard the statistic about a family earning $50,000 in wages will save $1,000 from the payroll tax cut? I’d guess pretty much everybody who has dipped into this debate for even a second.On the other hand, how many know the estimates of how many jobs will be created or preserved because of the increased economic activity it spurs? Very few of us who aren’t economists, I’d imagine. Conservative estimates put it between 400,000 to 700,000 jobs. But it’s the jobs that make this tax cut worth doing – unless progressives are willing to willing to accede to the Republican framing that all the economy and American families really need is “tax relief” – a phrase that actually appears in the Senate bill extending the payroll tax cut for two extra months.

This inability to connect economic policy to the larger problem of joblesssness is a real problem with the debate over the payroll tax cut. This disconnect explains why the unemployment insurance extension bundled with the payroll tax cut have attracted so much less attention. After all, if all that matters is the first tranche of money, the payroll tax cut will affect many more households than the UI extension. But all serious economists agree that the extension of unemployment insurance is a far more efficient fiscal support – providing about 50 to 100 percent more jobs per dollar added to the deficit.

While the Social Security Trust Fund is being reimbursed from the Treasury, that, too, comes with a cost. Once the GOP gains control (more than at present) of the federal government, the tax cut will be continued, upon orders from Grover Norquist, the Wall Street Journal editorial page, or just because of political expedience. And the fund will not be replenished from general revenues. In a harbinger of the argument the GOP will make, Representative David Schweikert argued earlier this month

what must not be lost in this discussion is that these dollars will come directly from debt paid back by U.S. taxpayers because they are owed to the Social Security trust fund.

This in turn increases the nation's debt because it eventually leads the Treasury to bail out the lost revenue in the Social Security trust fund.

In a Republican world, the loss in revenue will not be made up by a surtax on millionaires (which, even now, Democrats have not been able to enact), eliminating some corporate tax loopholes, or any measure which would inconvenience the 1% or the top 10%. And now, there are two firsts: as Bivens notes, Democrats argue for a tax cut extension primarily because it means less in taxes, rather than for the stimulative (Keynesian) impact; and conservatives can make a legitimate claim that the Social Security system increases the national debt.

Senate Majority Leader Reid is hinting that his party may be pushing the millionaires tax in the new year. That is at least good intent, but trouble looms.

HAPPY CHANUKAH MERRY CHRISTMAS

Share|