November 26, 2014

Payroll Tax Debate Includes Muddled Economic Rhetoric

  • Social Security, established in 1935, is the federal government’s largest program. It represents approximately one-fifth of the federal budget and...

Senate Democrats have released a revised plan to extend and expand a temporary cut in the Social Security payroll tax after competing proposals on the issue from the two parties both failed in the Senate last week.

The Democrats want to cut the tax to 3.1 percent of employees’ taxable wages, down from 4.2 percent this year and only half of the regular 6.2 percent rate. Social Security benefits would not be affected but the loss of this income to the Social Security system would increase its reliance on general government revenues.

To help pay for the tax cut, legislation introduced by Sen. Bob Casey of Pennsylvania would raise taxes on households with incomes over $1 million but on a temporary rather than a permanent basis.

Some Republicans quickly denounced the new proposal, objecting to Democratic descriptions of it as a “compromise.” Meanwhile, President Obama and other Democrats criticized the Republicans on the issue.

GOP congressional leaders said they were working on a new proposal to extend the payroll tax cut, although some Republican lawmakers are resisting the idea. House Speaker John Boehner said the House Republican Conference would discuss the issue further at a meeting later this week.

The payroll tax break is likely to be eventually tied to the continuation of unemployment benefits and the prevention of cuts in Medicare payments to physicians.

Diane Lim Rogers, chief economist for The Concord Coalition,  says the payroll tax debate illustrates how policymakers often mean different things when talking about proposals that “help” or “expand” the economy.

 “I often hear the words ‘stimulus’ and ‘growth’ used interchangeably, but when economists use them, we typically are making a distinction between different economic goals that apply to different circumstances,” Rogers writes in a new blog posting.

In the payroll tax debate, she says, “we are hearing arguments from both sides that muddle the distinctions between short-term, demand-side stimulus and longer-term supply-side growth.” The Concord Coalition has emphasized that the government could bolster the economy in the short run while still being fiscally responsible about the longer term.

Read more with Debating the Payroll Tax Cut: The Difference Between Stimulus and Growth