When You’re Trying to Decide if We Need to Renew the Payroll Tax Break, Picture This

December 1st, 2012 at 4:21 pm

It’s just a slide…in both senses of the word…of the real earnings—pretax, which is important—of middle-wage workers: blue collar workers in manufacturing and non-managers in services, adjusted for inflation.  And it’s not inflation holding back these wage rates—it’s the weak economy.   This series starts in 1964, and in nominal terms, it’s never grown more slowly than it has this year.

Source: BLS

So it is to his great credit that the President proposed another round of the payroll tax break, or something like it, as part of his opening bid for the cliff negotiations (here’s some background from my CBPP colleague Chuck Marr on this venerable idea).  With unemployment still way too high, we need to continue to support workers’ paychecks and temporarily offset some of the fiscal contraction from the tax increases and spending cuts that are likely to come out of the cliff negotiations.

I know that adding a spending program to a deficit reduction package may sound counterintuitive, but it’s really countercyclical.  And by dint of being temporary—we could even write in the legislation that it expires when unemployment goes (and stays) below 7%–it won’t affect the medium-term deficit.

Finally, a brief word on the politics.  Along with another round of the payroll tax cut, the President is aggressively arguing for preventing middle-class tax rates from going up on Jan 1.  But the R’s are refusing to go along unless he also blocks the rate increases on the top 2% of households.  So, between the two of these policies and the two of these parties, I ask you: which one is fighting to protect the middle-class??   That’s one of them there rhetorical questions.

[Ezra Klein and I had a good discussion of these points last night on the Lawrence O’Donnell Show—make sure you watch Ez’s excellent intro.]

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8 comments in reply to "When You’re Trying to Decide if We Need to Renew the Payroll Tax Break, Picture This"

  1. PeonInChief says:

    I don’t want to complain, but I miss my weekly music selection.


  2. pjr says:

    I’d suggest an income tax credit equal to one-third of employee Social Security contributions each year (and each paycheck). Stop messing with Social Security, but accomplish the same, worthy goal of reducing taxes on middle-class wage earners.


  3. Tony P. says:

    Linguistic nitpick, maybe: in this country we tax INCOMES, not households.

    Obama is not proposing to pick out 1 household out of every 50 and oppress it with higher taxes unto the 7th generation. That’s what he would be doing IF ONLY this were nation with zero “income mobility”. Naturally, the party of the currently-rich would like to believe that we’ve already eliminated this pesky income mobility thing and that therefore household income is as immutable as, say, skin color. From that point of view, Obama is indeed unfairly picking on a small, oppressed minority of HOUSEHOLDS. But ONLY from that ridiculous point of view.

    –TP


  4. urban legend says:

    pjr and Mark Thoma are correct. It is very important to restore the correct payroll tax and its correct function with the Federal accounting system as soon as possible. The equivalent of the payroll tax holiday should be provided as a separate demand-stimulation tax credit — and probably phased out in steps when, for example, the 4th quarter unemployment rate in any year remains under 7% and 6% respectively.


  5. D.Hunnel says:

    Mr. Bernstein, I’d be curious if you could speak to the Keynesian context of this conversation — pros and cons and projections… And, by the way, I’m beginning to hate rhetorical questions which include the words “What Would the Republicans Do?” — makes me want to throw things like rocks, sticks, and “Past performance DOES predict future inanities” in their faces, along with a collage of “but when it was YOUR ball game you said THIS” YouTube videos. Future generations are likely to look at Republicans NOT recognizing the impact of the proliferation of video recording devices (AND distribution venues) as a MAJOR “fail” (one of many).


  6. Fred Donaldson says:

    Heard some arguments on FOX that the current year saw a huge deficit in payroll tax receipts versus outlays. This is convenient rhetoric that ignores the fact that the money was paid back by the treasury, but some deficit hawks use it to say “more borrowing from China for entitlements.” I guess any lie works if it serves your agenda to hurt the middle class.


  7. Kevin Rica says:

    The integrity of the Social Security system should be kept intact as an insurance system. If it’s about to run a deficit, we may need to raise premiums. But those premiums should not be used to finance aircraft carriers, that is the purpose of general tax revenues.

    The Social Security system ran a cash surplus all the time that the Bushman was president. The deficits came from elsewhere and it is the rest of the budget that needs fixing.

    And the Dems need to be more honest about legal and illegal immigration. Just because a minimum wage worker pays some sales tax, that does not mean that he is capable of paying his way.

    Right now, the system is subsidizing employers by guaranteeing them unlimited cheap labor that immediately burdens the social safety net.

    We should demand reform of the immigration system so that every new immigrant is a net contributor to the budget. Unless the their employers pay them full health benefits and enough money to pay at least $1000 in federal taxes, they should not be admitted.

    We can’t afford to keep providing the EITC, State Children’s Health Insurance Program (SCHIP), and Medicaid to new immigrants if the system is not solvent now — not to mention that we can’t keep providing for Americans who lose their jobs to immigrant labor.

    If employers need workers to take unpleasant jobs — let them do what it takes to make people collect garbage and make steel — pay a middle class wage and benefits.


  8. Joe says:

    I would take the counter view here and advocate raising the payroll tax.

    Medicare and Social Security are seen as big contributors to current and future debt levels. By increasing payroll taxes you would both increase revenues (as president wants) and reduce the “entitlement gap” (as Republicans want).

    In order to stabilize the economy and the middle class make the payroll tax more progressive but still have everyone contribute. Keep in mind, payroll taxes (other than the income max) have not been increased in 22 years!!!

    If you still want to ease the middle class tax burden (and keep in mind it is at historic lows) then correspondingly reduce the lowest marginal rate.

    By increasing the payroll tax versus income taxes you would keep the government from simply spending incremental taxes. Instead people would see the payroll tax increase as funding benefits that most people really value.


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