Three quick thoughts on the payroll tax:
1. Here’s President Obama, Wednesday:
I think it’s fair to say that if the payroll tax cut is attached to a whole bunch of extraneous issues not related to making sure that the American people’s taxes don’t go up on January 1st, then it’s not something that I’m going to accept. And I don’t expect to have to veto it because I expect they’re going to have enough sense over on Capitol Hill to do the people’s business, and not try to load it up with a bunch of politics.
As I’ve written before, I don’t think a veto threat is particularly credible for the President under the current political dynamics of Congress. With the Senate controlled by the Democrats and everyone is now attuned to the idea that 41 Senators can stop legislation, it’s hard to imagine the President vetoing legislation that got a supermajority in a Democrat-controlled chamber. And if he can’t veto it, then the veto threats are empty, and veto bargaining should be theoretically just cheap talk.
2. I didn’t think I’d ever live see the Democrats so forcefully arguing for a reduction in the payroll tax. Twenty years ago, I’m pretty sure the modal liberal response to such an idea would have been, “well that’s a backdoor into gutting social security.” And even though the payroll tax holiday has not affected the social security trust fund, I’m not sure that should alleviate such liberal concerns: some portion of the political support for social security is based on the (mostly correct) public perception that it’s a social insurance program for workers paid for by those same workers, not a redistribution program transferring wealth from the rich to the poor.
This has been both good and bad for social security: it has allowed it to escape the wrath of public objections to “welfare” programs, but it has also produced a hesitancy among supporters for doing things like raising the cap on the payroll tax, which has left it as pretty-much the most regressive federal tax. But make no mistake: a payroll tax holiday is essentially no different than making social security a redistribution program. On the one hand, that’s good if you think (as I do) that the U.S. could a little more progressivity in its tax structure. But it’s not great if you like the program and think support might slip among the middle class when viewed as a wealth transfer program.
3. I honestly don’t see how the payroll tax could return to it’s former 7.65% (6.2% +1.45%) anytime soon. Since we all now know that for 47% of Americans the payroll taxes of SS/Medicare are more or less the sum total of their federal taxes, the 2% cut from December 2010 was the equivalent of a 26% decrease in taxes. Even worse, to restore it would mean a 35% increase in current tax burden. Even though the payroll tax cut was a temporary stimulus measure, I’m pretty sure the Republicans aren’t interested in raising taxes on anyone anytime soon. And I have a hard time believing the Democrats will ever sign on to what amounts to a 35% increase in total federal tax burden on the poorest half of Americans. But hey, I’ve underestimated them before.
