Wednesday, December 07, 2011

Payroll tax cut may be more of a political football than an economic godsend

During a recession the idea of economic stimulus such as a payroll tax cut makes sense, but in truth it is more of a political salve to show that politicians are "doing something" even though the actual, real, practical effect of the alleged stimulus may be quite meager at best. Right now, I am ambivalent about the economic value of the payroll tax cut. If it happens, fine, I'm okay with it, but if it doesn't happen this time around I'm okay with that too. Either way, I won't lose any sleep, nor will I jump with joy.
 
The U.S. economic outlook is weak enough that the payroll tax cut may make a (barely) noticeable difference in 2012, but I can't say that I am fully convinced of its efficacy. I think I would rather see a narrowing of the budget deficit and a strengthening of Social Security than a meager, one-time only gain in GDP.
 
The political value of the payroll tax cut is much more significant. Democrats want it so they can claim that they are "helping the middle class." On the flip side, Democrats would also like to see passage of the payroll tax cut fail so that they can use it as a club to convince the electorate how "mean-spirited" and "out of touch" Republicans are.
 
Republicans are lukewarm about the payroll tax cut. Many of them do see political value with being seen as "helping the middle class", but a significant fraction of them see greater value with being "fiscally responsible."
 
In short, Republicans could go along with a payroll tax cut deal that both costs them little and even gives them something in return, but since they gain political bonus points for being fiscally responsible (which includes refraining from excessive taxation) they stand to gain from failure to reach a deal.
 
So, ultimately, it comes down to how badly the Democrats want the payroll tax cut. They can have it if they want to pay for it politically, but they may decide that it simply isn't worth the price and that the economy will limp along well enough and that the "club" value of Republican "obstinacy" is worth its cost in terms of failing to "help the middle class."
 
Me? Right now, I'd prefer to see the "gimmick" of a payroll tax cut go away. If anything, I would rather see both an increase in the payroll tax rate and an increase in Social Security benefits. I think the latter would provide an economic stimulus as well as being "good for society."

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