Tuesday, December 20, 2011

The Payroll Tax Cut Extension

The politicians in DC are supposedly arguing over an extension to the payroll tax cut.  The payroll tax cut is a reduction of the employee's Social Security tax from 6.2% to 4.2%.  When the legislation was signed last year, it was effective for 2011 only.  The two major parties in DC (both for big government) were supposed to have an agreement to extend it by two months and now the Republicans won't agree to that because they want it extended for a year.  There is also a dispute about how to pay for it, as though letting Americans keep more of their money has to be "paid" for.

If both sides were serious about helping the unemployment situation, they would be cutting the payroll tax for the employer portion, so that labor would be cheaper and businesses would be more likely to hire people.  I have discussed this before.

So what about paying for this?  The Republicans were originally pushing to build an oil pipeline as part of the extension of the payroll tax cut, as if one should have anything to do with the other.  Of course, the Democrats always want to tax the rich or tax something in order to "pay" for it.

If the Republicans really wanted smaller government, why couldn't they put together a proposal with specific budget cuts to go along with the tax cut?  They could claim that the tax cut extension would then not increase the debt.  Some will say that the Senate won't pass it or Obama will veto it.  But let that happen.  If the Republicans put out a bill that cut foreign aid to Saudi Arabia and African dictators and cut farm subsidies to farmers, wouldn't that be rather embarrassing for the Senate Democrats to vote it down or for Obama to veto it?  The reason that the Republicans in DC won't do this is because they are not really in favor of smaller government.

There is one more thing to mention about this payroll tax cut extension.  As of right now (December 20), there is no agreement.  People don't know what their tax rate will be in just 12 days.  This is 2% of the paychecks of most workers.  This can mean over $100 per month for some families.

Robert Higgs talks about the Great Depression and that one of the factors was "regime uncertainty".  While I believe that spending, regulations, and monetary policy play the biggest role in determining the strength of the economy, there is an argument to be made that regime uncertainty is playing a role too in our current economy.  People do not know what to expect.  How can people properly plan when they don't even know what their paycheck will look like in a few weeks?

Personally, I hope the tax cut is extended.  The U.S. government is going over a cliff anyway.  I will take what I can get now.  We will have major trouble ahead with or without a payroll tax cut extension.

No comments: