Time to end a tax break

October 7, 2012

AT THE RISK of spoiling it, we’d like to take note of a quietly growing bipartisan consensus in support of doing something that might actually help the long-term financial condition of the United States government — or, to be more precise, a growing consensus against doing something that might harm U.S. finances. We speak of the broad opposition among Republicans and Democrats to another one-year extension of the Social Security payroll tax holiday, which workers have enjoyed for the past two years.

House Minority Leader Nancy Pelosi has said she is against an extension, as has Rep. Kevin Brady (R-Texas), a senior member of the Republican majority on the House Ways and Means Committee. Top Senate members of the Finance Committee from both parties have echoed those views. Treasury Secretary Timothy F. Geithner has testified that the tax cut “has to be . . . temporary.” This is quite a contrast to the partisan fight earlier this year over extending the reduction.

This is not to deny the positive impact of the two-year tax cut, which shaved two percentage points off the 6.2 percent of income (up to $110,000) that workers usually pay into Social Security. Each year, the savings pumped about $100 billion into the labor force’s take-home pay, with the lowest earners benefiting proportionately the most. Nor is it to deny the contractionary impact, other things being equal, of ending the break now, while the economy is still weak.

However, the tax cut was adding to the federal deficit each year. To extend the cut once again risks converting a temporary stimulus into a permanent feature of the tax code, so embedded in the public’s expectations that it becomes impossible to undo. That would harm what’s left of the U.S. government’s fiscal credibility and upset expectations about the long-run flow of federal revenue — making it that much more difficult for Congress to pull off a “grand bargain” on taxes, entitlements and the debt.

If necessary, Congress could mitigate the short-term economic impact of ending the payroll tax cut through other means. The Federal Reserve’s recent announcement of more quantitative easing also reduces the risks to growth. Meanwhile, allowing the payroll tax cut to lapse would help build confidence between the two parties; it will be easier for them to agree on other issues if neither tries to score easy political points by offering yet another year of a popular tax break. Getting the country safely over the “fiscal cliff” after November will be hard enough, politically and economically, without adding a replay of the nasty payroll tax fight to Congress’s burdens.

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