Advancing a Free Society

How Not to Make Public Policy: The Payroll Tax Cut

Wednesday, February 15, 2012

Lawmakers have been under enormous pressure to extend the current "temporary" payroll tax cut.  Today e21 published my piece explaining how the cut encompasses nearly every possible feature of poor public policy making.  Excerpts:

1. Instability, uncertainty and brinksmanship. In December, 2010, Congress consented to “temporarily” reduce the Soc. Sec. payroll tax for 2011. It is now anyone’s guess how long this will continue to be extended. Outside parties are told on the one hand that the policy is temporary while they simultaneously hear elected officials announcing that it will not soon expire. This environment is the exact opposite of that which allows private sector actors to make responsible decisions that foster growth.

2. Undermining Social Security finances. For decades it has been known that Social Security costs would rise markedly when the first baby boomers started claiming benefits in 2008. That event coincided with the Great Recession, depressing the program’s revenue intake and causing its expenditures by 2010 to exceed its tax income far earlier than prior projections. Historians will someday scratch their heads in amazement over lawmakers’ response; taking action to dramatically reduce the program’s tax revenues below their already-depressed levels.

3. Worsening budget problems. It is well known that the federal government is running its fourth consecutive year of unsustainably large deficits, with no end in sight. It has proved nearly impossible to find a mutually acceptable way to keep the payroll tax cut from increasing the deficit, with one side wanting to cut spending and the other wanting to raise taxes. Our general budget policy paralysis was already problematic enough before creating the additional recurring issue of whether and how to also budget for the payroll tax cut.

4. Undermining budget transparency. Lawmakers used a budget gimmick to transfer $105 billion to the Social Security Trust Fund in last year alone – and likely still more this year -- to make it appear that it is unaffected by the reduction in its tax income. This revenue infusion – in the form of binding Treasury debt obligations -- in effect means that income tax payers are being committed to subsidize Social Security without being forthrightly informed of it.

5. Destruction of the historical Social Security compact. FDR envisioned a Social Security program whose benefits would be politically inviolate because they were financed by separate worker contributions in a separate Trust Fund. This longstanding special status was jettisoned by the decision to begin subsidizing Soc. Sec. with income taxes to cover for the payroll tax cut.

6. Undercutting the quality of the public policy debate. The sole justification for all of this policy damage is that the payroll tax cut is necessary to maintain progress in economic recovery. This argument, questionable with respect to the first one-year cut, was made risible by the two-month extension (as though recovery is spurred by tax relief parceled out sixty days at a time).

7 Temptation to use irresponsible budget offsets. The public commitment of lawmakers to extend the payroll tax cut through year’s end engendered some desperation in the search for budget offsets. Recently shopped on Capitol Hill was a proposal that, if it had been used to “pay for” the payroll tax cut, would have meant that lawmakers had employed a policy of deliberately further underfunding employer-provided pensions as a means of budgeting for a policy of deliberately further underfunding Social Security.

The payroll tax cut's temporary nature undoes virtually all of the positive stimulus impact claimed for it, while the adverse effects include high policy uncertainty, undercutting budget transparency, increased fiscal pressure, and lasting damage to Social Security’s financial and political foundation, this last of which may well prove irreparable.  If lawmakers cannot muster the will to terminate it now, one must hope that they are able to do so before it goes on too much longer.

Read Charles Blahous’ full post…