AUTHOR: FiscalFutureDaily, Site Administrator
Dec 13, 2010

Sen. Bernie Sanders became social-media sensation with his eight-hour speech against the tax cut deal, but the real action may happen today when the Senate is expected to actually vote on the plan. There’s fierce debate over whether the tax cuts, which will run up the national debt by $858 billion, will actually speed up the economy and create jobs, and over whether the payroll tax holiday will undercut Social Security in the long run. The lame-duck Congress is almost out of time, and there’s a lot left to do.

Enough Bang for the Buck?

Paul Krugman says the tax deal will give the economy a boost, but not enough to justify its cost. Most of the metaphors you hear, he says, are wrong:

“I say, block those metaphors. America’s economy isn’t a stalled car, nor is it an invalid who will soon return to health if he gets a bit more rest. Our problems are longer-term than either metaphor implies.
And bad metaphors make for bad policy. The idea that the economic engine is going to catch or the patient rise from his sickbed any day now encourages policy makers to settle for sloppy, short-term measures when the economy really needs well-designed, sustained support.”

But White House chief economic adviser Austan Goolsbee makes his case for the deal in the latest “White House Whiteboard” segment:

The Payroll Tax: How Long of a Holiday?

There’s a lot of concern out there today over one part of the tax plan, a one-year payroll tax holiday for employees (but not for employers). In other words, Social Security taxes for workers would go down by one-third next year, and many worry that this could undercut Social Security in the long run. We’ll round up some comments below, but here are three things you might want to remember about this idea:

• Cutting the payroll tax was cited as one of the most effective strategies to goose the economy in the short term by the Congressional Budget Office. But the CBO analysis rated cutting taxes for employers as a bigger boost than cuts for workers (because cuts for employers would lower the cost of hiring more people).
• The government will cover the $112 billion cost of the one-year holiday out of general revenue, so the long-term projections for Social Security shouldn’t change (the trust fund is projected to cover benefits until 2037).
• If the payroll tax holiday is extended beyond one year or made permanent, however, the financial outlook for Social Security could get much worse, because the system will be taking in less revenue and running down its trust fund faster.

Conservative economist Bruce Bartlett doesn’t think the payroll tax cut will work and is already on record worrying about the risks of changing the payroll tax:

“In that post, I questioned the wisdom of a temporary cut in the payroll tax rate on the grounds that Republicans will never allow it to expire. They will claim that to do so would constitute a massive tax increase on working Americans. Hence, this “temporary” tax cut will become permanent, thus permanently undermining Social Security’s finances and paving the way for conversion of that system into a de facto welfare program, which would then become politically vulnerable to effective abolition through privatization.

The Concord Coalition sees the advantages of the payroll tax holiday and says that would do more for the economy than extending the Bush tax cuts – so long as the holiday ends on schedule.

“Having this “tax holiday” remain a holiday and not the beginning of a permanent vacation, is crucial in our evaluation of it as a reasonable trade-off. And of course, if it is designed to be a more stimulative tax cut than the other tax cuts, it should have been traded off for those other less effective tax cuts, not just piled on as yet another opportunity for seemingly pain-free increase in deficits.”

Derek Thompson at Atlantic Wire says “A Permanent Payroll Cut Doesn’t Have to Doom Social Security,” particularly if we take the opportunity to replace it with something better, like a carbon tax:

“Our tax code is over-reliant on taxing things that are good, like income and investment, and under-reliant on taxing things that are bad, like pollution.”

At Mother Jones, Kevin Drum considers the possibility that the payroll tax holiday is a “Trojan Horse,” but comes up with several reasons why he thinks those fears are overblown, including:

“Beltway elites are really, really obsessed with Social Security solvency. For once this will work in our favor. Calls to allow the cuts to continue will be met with almost unanimous establishment condemnation.”

Oh, Yeah, the Deficit

Economix reports the Congressional Budget Office put out what it calls “A Gentle Nudge on the Deficit” Friday, pointing out the risks of waiting to act. You can read the CBO report for yourself, but the bottom line is the longer we wait, the higher our national debt will be, and the more we’ll have to cut spending or raise taxes when we are forced to deal with it (and as with all bills, even if the day of reckoning is postponed, it can never be fully avoided).

As a libertarian, Jeffrey Miron is usually okay with government gridlock, but not when it comes to our fiscal problems:

“Gridlock is not going to solve our long-run fiscal imbalance. Any attempt to reduce that imbalance must tackle Medicare, yet neither party has any interest in advocating cuts. In this case, we need to scale back existing policies, not just avoid new policies.”

The Committee for a Responsible Federal Budget says the plan is costly now, and would cost even more (up to $6 trillion) if Congress extends it in 2012:

“The tax compromise is a “deal” that doesn’t deal with fiscal reality.”

Chart of the Day

Take a look in the rearview mirror: the national debt has skyrocketed in the last decade:

 

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Fiscal Future Daily is produced by Public Agenda for Choosing Our Fiscal Future, in partnership with the National Academy of Public Administration and with support by the John D. and Catherine T. MacArthur Foundation. The editor in chief is Scott Bittle, with contributors Francie Grace, David White, Jen Vento, Hart Hooton and Tom Watson.