Permanent Payroll Tax Cut Doesn't Have to Doom Social Security

Tim Fernholz of The American Prospect, Kevin Drum of Mother Jones and other writers are asking how the keystone of the president's signature stimulus deal -- the payroll tax cut (explainer here) -- could impact Social Security, which is funded through the payroll tax.

Smart question! The New Yorker's Hendrik Hertzberg had a smart answer:

If the economic crisis necessitates a second stimulus--and it probably will--then a payroll-tax holiday deserves a look. But it's only half a good idea. A whole good idea would be to make a payroll-tax holiday the first step in an orderly transition to scrapping the payroll tax altogether and replacing the lost revenue with a package of levies on things that, unlike jobs, we want less rather than more of--things like pollution, carbon emissions, oil imports, inefficient use of energy and natural resources, and excessive consumption. The net tax burden on the economy would be unchanged, but the shift in relative price signals would nudge investment from resource-intensive enterprises toward labor-intensive ones. This wouldn't be just a tax adjustment. It would be an environmental program, an anti-global-warming program, a youth-employment (and anti-crime) program, and an energy program.
Replacing the entire payroll tax with Pegovian taxes is super bold, but Hertzberg is looking in the right direction. Our tax code is over-reliant on taxing things that are good, like income and investment, and under-reliant on taxing things that are bad, like pollution.

One of the most powerful forces in government and psychology is status quo bias. People say they like change, but acceptable change often looks more like a face lift than full reconstructive facial-cranial surgery. So if the payroll tax cut proves to be a permanent cut, progressives could get behind a new carbon or consumption tax that offsets the lost revenue. That kind of reform would be good for revenue, good for workers, and good for reducing things we want less of.