A major shift in the payroll debate

For months, Republican leaders have balked at the notion of a payroll tax-cut extension. Despite the fact that the tax break was largely their idea in the first place, GOP officials have said they would block President Obama’s request, regardless of the economic consequences.

But Democrats assumed this position was untenable, and they were right. If the payroll break, approved last December, expires at the end of the calendar year, over 100 million U.S. households would see a fairly significant tax increase during difficult economic times — and it would be entirely Republicans’ fault.

Sure, the standard GOP response is that they disapprove of the particulars, most notably the fact that Dems would pay for the tax-cut extension with a modest surtax on millionaires and billionaires. But as David Firestone explained yesterday, that still leaves the GOP in an awkward position.

Are Republicans going to deny the average working family a $1,500 tax break in order to spare millionaires a modest increase? That $1,500 or so, multiplied by every paycheck in America, would have a huge effect on economic growth next year, widely estimated as between 1.5 and 2 percentage points. The tax increase would affect only a tiny fraction of small businesses with employees, despite the endless Republican claims that it would stifle job creation.

If Republicans refuse that deal, it will play directly into Democratic hopes of shaping next year’s election around the increasingly popular theme of income inequality. (“Why did your taxes go up? So that Republicans could protect millionaires.”) They could pay for it with cuts to federal programs that benefit the middle class, which would be self-defeating. Or, if they approve the payroll tax cut without paying for it (as they did last year), that would increase the deficit and reveal the Republican hypocrisy in preferring low taxes for the rich over deficit-cutting.

Either way, the anti-tax crowd is boxed in.

This point is not lost on Republicans, who just yesterday, started changing their tune. After months of saying they would oppose an extension, GOP leaders finally said they would support another year of the payroll break — but only if it’s paid for in some other way.

When push comes to shove, Republicans will do just about anything to protect millionaires and billionaires from having to sacrifice anything at all.

All told, the package would cost about $115 billion in 2012. How would the GOP cover the costs? As of yesterday, Republicans wouldn’t say.

The fact that the GOP has come around on the issue itself, though, set some minds at ease. The Wall Street Journal reports that the Republican reversal “virtually assures that American wage-earners will continue to receive the benefit next year.” Ezra said something similar this morning.

That’s probably correct, though it might be a little premature to assume success on this. There’s a very real chance that the parties will struggle over financing, the effort will collapse, and Republicans, who don’t support the workers’ tax break anyway, will say, “Democrats raised taxes when they rejected our version of paying for the bill.” The media would say “both sides” are to blame because the two parties “wouldn’t compromise,” and the economy will take a very serious hit.

Yesterday’s GOP shift was a major step in the right direction, but the hurdles between here and passage remain significant.