Payroll Tax Holiday a Terrible Idea

Pete Domenici and Alice Rivlin have proposed a one-year payroll tax holiday to stimulate the economy. I have previously explained why I think monkeying around with the payroll tax is a dreadful idea and won't repeat my argument here. Today, I just want to ask one question: What are the odds that Republicans will ever allow this one-year tax holiday to expire? They wrote the Bush tax cuts with explicit expiration dates and then when it came time for the law they wrote to take effect exactly as they wrote it, they said any failure to extend them permanently would constitute the biggest tax increase in history. Sadly, Obama allowed himself to fall into the Republican trap, but that's another story. My point is that if allowing the Bush tax cuts to expire is the biggest tax increase in history, one that Republicans claim would decimate a still-fragile economy, then surely expiration of a payroll tax holiday would also constitute a massive tax increase on the working people of America. And what are the odds that the economy won't still be fragile a year from now? Zero, I would say.

I respect Pete and Alice and know they are just trying, as are we all, to find something that will stimulate the economy that the Republicans will allow to take effect. But a payroll tax holiday is Pandora's Box and best left unopened. Republicans would prefer to destroy Social Security's finances or permanently fund it with general revenues than allow a once-suspended payroll tax to be reimposed. Arch Social Security hater Peter Ferrara once told me that funding it with general revenues was part of his plan to destroy it by converting Social Security into a welfare program, rather than an earned benefit. He was right.

In conclusion, the payroll tax holiday is misguided. The potential benefits are uncertain, but the dangers are not.

"they are just trying, as are we all, to find something that will stimulate the economy that the Republicans will allow to take effect"

This is what it all comes down to. I think many people had resigned themselves to the fact that any further fiscal stimulus would be impossible to pass and thus were counting on the Fed to pick up the slack. These same people (and many others, including Bernanke) are now surprised at the vitriol being aimed at the Fed and QE2. They're asking themselves what will happen if DC politics prevents the Fed from further action and are scrambling to come up with alternatives. There aren't any, really.

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