I don’t think that tax cuts are the best way to stimulate more economic activity. Instead of including $288 billion in abandoned tax revenue, the American Recovery and Reinvestment Act (ARRA or “The Stimulus”) would have been more effective if that money had been invested in infrastructure projects that would likely have created large numbers of jobs, even if a good portion of them were temporary.
But that doesn’t mean that tax cuts aren’t stimulative. Of course they are. Any time American citizens have more money in their pockets, a certain amount will be spent and will stimulate the economy. The question would be whether those stimulative effects are sufficient to compensate for problems those cuts might cause, such as increased public sector deficits and curtailed investment in critical public projects. It seems pretty clear that the tax cuts of the early Bush years did not meet this critical test.
And I would normally oppose any tax cut that means even greater future problems for Medicare and for Social Security (which has been running surpluses until this year and which could be “fixed” through relatively straightforward changes).
But I’ve been fearing a second recession since before the last one ended in 2009, and my fears of incredibly, painfully slow growth have been proven true.
One reason we’ve continued to have any growth at all in the first half of 2011 has been the payroll tax cut at the end of 2010. On salaries up to $106,800, all wage earners in America have traditionally paid 6.2% in payroll taxes, but that rate was cut to 4.2% for 2012 in a deal pushed by the Obama team (it’s summarized here) that also extended all the Bush tax cuts and extended unemployment insurance benefits.
All of these tax cuts worsened the long-term deficit picture, but they were all stimulative to some degree. The payroll tax cuts were especially stimulative, because it’s very likely that the bulk of that $1,000 reduction for a worker making $50,000 or a $2,000 cut for someone making $100,000 would be spent on goods or services — or used to reduce household debt — rather than simply saved.
With the economy still so precarious, I’m in favor of extending that cut (yes, I’d benefit from it, but over the years I’ve advocated lots of policies that wouldn’t benefit me). Yes, extending the cut deepens long-term deficits, but I’m much more afraid right now of reduced consumer spending in the short term.
Obviously, because only the first $106,800 of income is subject to the payroll tax, it is essentially regressive, putting a higher percentage burden on the middle and lower class than on the highest earners. Those are the very people that this recession has hit the hardest and the ones the economy most needs to be spending consistently.
Obama now wants to extend that payroll tax cut, but the Republican opposition is lining up against the extension. Harold Meyerson explores the politics and morality of that choice in a great column today in the Washington Post:
While President Obama has made clear that he supports extending the lower 4.2 percent payroll tax rate for another year, to keep the economy from contracting further, congressional Republicans have made their opposition equally clear. â€œI donâ€™t think thatâ€™s a good idea,â€ said Dave Camp (R-Mich.), chairman of the tax-writing House Ways and Means Committee. Camp complained that it would push the deficit higher. House Budget Committee Chairman Paul Ryan (R-Wis.), the man whoâ€™d have us scrap Medicare, concurred. â€œIt would simply exacerbate our debt problems,â€ he said on Fox News Sunday this month.
This concern for the debt, touching though it may be, didnâ€™t keep Republicans from enacting two waves of tax cuts under George W. Bush. It hasnâ€™t kept them from opposing our current presidentâ€™s proposal to restore the Clinton-era tax rates on the wealthy. But when weâ€™re talking about taxes on the majority of Americans, those who work for a living and donâ€™t make six-figure incomes, the Republican brain lobe devoted to debt reduction through tax increases goes abuzz with synaptic frenzy.
Unless we want to make dramatic cuts in some of the most popular government programs, we’re going to have to raise some taxes eventually. When the economy is more firmly in growth mode, we should probably restore the payroll tax to 6.2%, let ALL the Bush tax cuts expire, and raise taxes on the highest earners. We might even eventually need a national sales tax.
But raising the payroll tax right now? Reducing an average worker’s spending power by that degree in this economy?
Here’s hoping that tax cut — one of the most stimulative tax cuts possible — sticks around for another year.