Payroll Tax Fiasco - Again

Not content to aid Obama' s re-election, Republicans are jeopardizing their chances of retaining the House of Representatives by showing no principle in the fight over the payroll tax temporary reduction. It seemed like a weak sequel to their December foolishness. Since it was clear that they were always going to cave on a deal to continue to blow a hole in Social Security's finances, what principles were they standing for that got in the way of a deal.

Not that the Democrats acted much better, but they seem to have won the media battle. Democrats were talking up a surtax on those earning over $1 million as a way to offset the lost revenue.

Of course, none of this is sensible policy. But neither party operates by any fixed set of principles, so how can we expect any sensible outcome.

Payroll Tax Fiasco

Pillars of the economy meet with members of Congress.

Today's WSJ editorial excoriates House Republicans for their mishandling the payroll tax debate. While there is plenty of tactical political blame to be shared by Boehner and McConnell, the real crime is that we are debating this at all. The tax holiday on payroll taxes that temporarily cut the rate from 6.2% to 4.2%, is never going to be made permanent. Everyone knows it, so any impact on hiring is already discounted. The current tax holiday has done nothing for unemployment, which remains stubbornly high. Worse it is blowing a hole in the social security accounting, bringing the day of bankruptcy closer, much faster.

A better approach comes from John B. Taylor, on the opposite page from the editorial, who argues that stable tax policy would help recovery much more than any gimmickry. I would say that stable regulatory policy should be added to the mix, as well. He points out that the Congressional Budget Office has called for higher tax rates as one option to repair social security's balance sheets. The current loss of revenue from reduced rates only makes that option more attractive in the long run, so it is a self defeating policy, as employers know that they are likely to be saddled with higher taxes later and just have to lay people off. As a manager, I am always trying to balance hiring against future budget expectations, sometimes leaving positions vacant as a hedge. I can't imagine business owners think differently.

Taylor has a slightly different argument about why the temporary holiday is bad.

But the policies are worse than doing nothing at all. Rather than stimulate the economy, they hold the economy back by creating policy unpredictability and by distracting Washington from crucial long-term reforms that are key to restoring economic growth and creating jobs.

He also attacks the complexity of the tax code, and notes that there are 84 temporary provisions expiring this year. I think the Congress likes the temporary nature of the provisions, because they can collect rents from special interests every few years as inducement to extend them. This is in line with my recent theme of crony capitalism. How can the following temporary measure be of any value to the economy? "Three year depreciation for race horses two years old or younger." Really, when the race horse owners, those pillars of the American economy, need this policy extended, I am sure they are going to be very generous giving to their senator's re-election campaign.