The downside to the payroll tax break

In recent months, the payroll tax cut has become one of the centerpieces of the White House’s economic agenda. The tax break, which was approved late last year and will expire at the end of this year, mainly benefits the middle class and the working poor, putting some additional money in each paycheck. Congressional Republicans are eager to scrap the tax cut.

But is the policy itself any good? The idea is to put a little extra money in the hands of those who need it, in the hopes that they’ll spend it, boosting demand in the process. Bruce Bartlett, who lately doesn’t have much use for the Republican economic agenda, argues that the payroll break isn’t the most effective policy — there’s “no evidence that the lower payroll tax has done much of anything to stimulate either spending or hiring.” His piece fleshes out a few reasons why the policy appears to be of limited utility.

OK, but if this tax policy isn’t ideal, what’s the more effective way to go? Bruce offers an alternative:

In my view, the $110 billion cost of the one-year Social Security tax cut would have been far better spent on measures that would actively raise spending in the economy. Public works would be the best way of doing that. Under current economic conditions, all tax cuts are essentially passive and do almost nothing to increase aggregate demand or economic output.

Sounds good to me. The problem, though, is the same problem we run into every time we talk about addressing any national challenge through effective public policy: Republicans play a key role in the decision-making process.

If given a choice between a tax break worth $110 billion and a public-works initiative worth $110 billion, I would gladly go with the latter. When it comes to bang for the public, that kind of public investment would prove far more stimulative to the larger economy, and produce more tangible results.

But that’s not the choice. Republicans are against the middle-class tax break and they’re against public-works initiatives. What’s the GOP for? Austerity measures intended to make the economy worse.

Bruce believes Democrats are using the payroll tax cut “mainly as a political ploy.” There’s probably some truth to that, but under the circumstances, Dems are looking for any measure that could have a discernable effect on the economy in a positive direction. They seem to think the payroll break (a) would probably help a little; and (b) can probably get through Congress if Republicans fear electoral pushback.

The piece concludes, “Although the case for additional fiscal stimulus is overwhelming, it would be much better to find more economically stimulative alternatives to simply extending the temporary payroll tax cut.”

I agree. Now if there were only some way to persuade Republicans on Capitol Hill, we’d be getting somewhere.