Here’s another clunker of an economic-revitalization proposal from the rump of Barack Obama’s quickly dissipating economy team: a temporary payroll-tax cut.
We’ve already had one of those: We’re enjoying the fruits of it right now — or hadn’t you noticed? As part of the December 2010 tax deal that prevented an increase in income-tax rates above those established in the Bush administration, 2 percent of the employee-paid payroll tax was temporarily cut. (Look for that “temporary” cut to live a long, long time.) Now the Obama administration is considering doing the same for the employer-paid part of the payroll tax, because the White House is beside itself with fear over the climbing unemployment rate.
Progressives are tearing out their dreadlocks and little wispy pony tails: The payroll tax is an essential part of the legislative fiction that Social Security pays for itself. Of course, Social Security does no such thing — the payroll-tax revenues go into the same big pot as every other tax dollar, and general funds already are being used to subsidize Social Security’s deficit — but it is essential to the leftist project to pretend that Social Security is a sort of pension system that you “pay into” in exchange for future benefits, rather than a simple welfare program supported by the destructive taxation of income. Progressives know full well that if the payroll-tax fiction is diminished and the bulk of Social Security ends up being paid out of general funds, then, as the Ponzi scheme gets ever more upside-down, there is going to be tremendous pressure to means-test the program, reducing benefits for the well-off. The Left fears and loathes that outcome: They want full, universal buy-in, because the welfare state is at its most powerful when everybody is on welfare.
As much fun as it would be to watch President Obama once again stick it to the hippies and basically dare them to withhold their votes (Gitmo! Rendition! Enhanced interrogations! War on Drugs! War in Pakistan! War on Libya! War on Yemen! You guys are suckers!), a temporary tax holiday is a pretty dumb idea, and conservatives should resist it.
The temporary tax-cut stimulus is basically the same Keynesian wolf dressed in supply-side clothing: Dump some money into the economy and hope that the sound of it sloshing around distracts the rubes from the fact that real economic productivity has taken a shot to the solar plexus. Milton Friedman explained, with something he called the “Permanent Income Hypothesis,” that such temporary measures have little meaningful effect on consumption behavior, and it’s not hard to see why: If you make an extra $100 this week, you don’t act as if you’re going to make an extra $100 a week from here on out if you know for a fact that it’s a one-time thing. If you get a short-term tax cut, or one that is supposed to be short-term, you don’t go hiring a bunch of people at your business based on that. Hiring is a long-term commitment.
All of this ignores the deeper underlying fact that jobs are not the real problem. Sure, they’re the real problem for politicians, but not for the economy. Jobs are not an end unto themselves: They are a result of the fact that real production is happening in the economy. If you want real productivity, you need real investment, which comes from real savings, i.e. consuming less than you produce and using the difference to expand production. Everything else is just playing around with little pieces of green paper.
Would you make a major investment decision — say, starting a company, launching a new product line, or expanding a factory — if doing so were profitable only because of a temporary tax? Probably not.
And, it bears repeating, when you are running a deficit, a tax cut without a spending cut is not a tax cut — it’s a tax deferral. So we’re just dragging some consumption back from the future to the present. (You’re welcome, future!)
Here’s what you want to do instead: Adopt a balanced-budget plan. It doesn’t have to balance the budget today, or tomorrow, or even in five years. It just has to stop the growth of the debt as a share of GDP and then shrink it. You adopt a simple, intelligent tax code (broad base, only a few brackets, few or no exemptions) and you set the rates at what you need to cover your spending. And then comes the important part: You leave it the hell alone.
With taxes (and, especially, with regulations) it’s not just the outright burden that destroys investment and undercuts employment — it’s the instability. Real entrepreneurs, the people who start firms, build factories, and buy equipment, have to make long-term plans. Only Wall Street can operate profitably on a microsecond timeline. Entrepreneurs need stable rules and a stable tax regime. They need predictability. I’d love to make radical changes in our society — public schools, you’re outta here! — but from the point of view of long-term material prosperity, it is probably better to have good institutions that are imperfect but stable than to have unstable institutions that aim at perfection.
Reform, when it is necessary, needs to be far-seeing. But far-seeing is the opposite of what Obama & Co. are up to just now: They cannot see past the next election and the heavy shadow that rising unemployment casts across this president’s prospects. Thus, the cheap gimmicks, which ought not be mistaken for real progress.
— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.