Government: Payroll tax follies
The editorial board blasted Senate Democrats on Monday for proposing a temporary payroll tax cut for employers (with little evidence that it would help create jobs) offset by a permanent tax increase on millionaires. As it happens, Democrats were already abandoning that idea. Now they're calling for a 50% cut in the payroll tax on employees only, offset in part by a temporary tax increase on millionaires. The tax cut would be worth up to $1,100 per taxpayer more than the payroll tax reduction that's due to expire Dec. 31, although for the median income filer it would amount to about $330.
The new proposal is an improvement, but it's still a nonstarter in this Congress. Not only are there plenty of small-government Republicans who don't want to continue the payroll tax cut, there's little or no support in the party for a surtax on high-income taxpayers.
Politics aside, the Democrats' latest offering is problematic for at least two reasons.
First, Congress should stop piling on the targeted tax breaks in pursuit of elusive economic growth. There's a potential for major stimulus, but it would come from the sort of fundamental overhaul that the Simpson-Bowles commission recommended. Vastly simplifying the tax code to broaden the base by winnowing the thicket of exemptions and deductions would allow Congress to raise more money while lowering marginal rates. It also would give businesses and investors far more confidence about what their taxes will be going forward, encouraging them to put their vast storehouses of idle cash to work.
Second, even if there's no hope of a big deal on tax reform and deficit reduction in the near term, Congress shouldn't make those jobs harder in the waning days of its lackluster 2011 session. As my former colleague Janet Hook reported in the Wall Street Journal, the Democrats would pay for a deeper temporary cut in payroll taxes in part by imposing a surtax on millionaires for a decade. That's reminiscent of California voters slapping surtaxes on millionaires and smokers to support a variety of narrow social objectives, making it more difficult for legislators to balance the overall state budget.
Even if you think the wealthy need to pay more of the federal tab, the right way to do so is by looking at all of the government's revenue needs. I've lost track of how many times Senate Democrats have proposed to slap a surcharge on millionaires to pay for this jobs program or that economic stimulus. Clearly, they're doing so to score political points against Republicans, who've voted consistently against any kind of tax hikes. Can we all agree that the point has been made, and get on with actual policymaking?
There's broad agreement that the current payroll tax cut has been good for the economy, and that letting it expire as scheduled would be a drag on the already shaky recovery. That's why the editorial board called for extending the cut for another year. Rather than deepening the cut, though, Congress shuld seek a more meaningful stimulus by simplifying the tax code, broadening the base and lowering rates, particularly on the corporate side, where U.S.-based companies face among the highest marginal rates in the world.
Considering the abject failure of the congressional deficit-cutting "super committee" to agree even on a package of tax reforms and spending cuts too small to solve the country's long-term fiscal problems, it's probably quixotic to think that a major tax deal could be worked out in the year before a presidential election. But I'm not ready to trade a difficult-to-achieve but substantial reform for an incremental tax cut worth no more than $21 a week.
-- Jon Healey
Photo: Senate Majority Leader Harry Reid (D-Nev.) speaks about payroll taxes on Dec. 1, accompanied by Sens. Patty Murray (D-Wash.), Richard Durbin (D-Ill.) and Charles Schumer (D-N.Y.). Credit: Charles Dharapak / Associated Press