After months of threatening to block another payroll tax break, Republican leadership now says it supports a $250 billion plan to cut Social Security taxes. That makes it a virtual guarantee that the typical family will get to keep an extra $1,500 of its earnings through 2012.
Or does it? Somebody has to pay for this thing -- unless we agree to put it on the national credit card. That means both parties need to find $250 billion lying around. The GOP wants to find the it in spending cuts. The Democrats want to find it in a new "millionaire tax."
The showdown over offsets isn't a sideshow. It is the show. If the parties finish December at loggerheads over paying for the payroll tax break, it won't happen. Instead, there will be another blame game. Democrats will say Republicans blocked a tax break for every working family to protect the richest 0.5%. Republicans will say Democrats insisted on raising taxes on job creators in a recession. Those arguments sound way too realistic for me to believe the payroll tax cut is a done deal.
Let's assume it is a done deal. Is it even a good idea? The payroll tax cut for workers goes like this [ed: skip to the end of this section if you truly hate numbers]. Every year, the government keeps about 6 percent of your wages for Social Security. In 2011, the feds only kept about 4 percent. The point was to make you 2 percent richer. Democrats want to extend and expand this tax break by taking down the Social Security to about 3 percent and putting employer payroll taxes at the same level (the Social Security tax is shared by employers and employees). The upshot is that a family making $50,000 a year would would keep another $1,500, and businesses would have higher cash piles to make hires and investments.
If the diagnosis for the sick U.S. economy is too little demand, then making every working family 3 percent richer isn't a bad medicine. Wall Street economists guess it could add about 1 percentage point of growth in 2012. In the first half of 2011, 1 percent growth would have been the difference between our weak recovery and a straight-up recession. But as far as end-of-year stimulus goes, the payroll tax cut is not the most efficient plan, or even a satisfactory one.
It's something of a religion in macroeconomic theory that the best stimulus focuses its laser beam on the poor. This isn't out of charity, but out of solid economics. Somebody making $101 a week is more likely to spend her next dollar than somebody making $10,001 a week. So if you're the government borrowing money a limited amount of money, you don't want to hand it no-strings-attached to the "job creators," who as Republicans acknowledge, are likely to already be rich. You want to hand it to the cash-needy. The shoppers. The "grocery-receipt creators."
The headline says "forget job creators," and of course I'm not saying we should forget about them forever. But maybe we forget the richest of them for the next month or so. Companies aren't hiring, and the reason why has very little to do with tax rates. They're not hiring because they're worried about growth. Rightly so. Middle-class families aren't spending because they're in debt and their incomes aren't growing. Lower interest rates can't fix that. A payroll tax holiday combined with jobless benefit extension won't entirely fix them problem either. But it's the right step for now.
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