As the Wall Street Journal notes this morning, the White House has unveiled “a digital clock at the top of its website, counting down the days, hours, minutes and seconds until the tax cut will expire if Congress doesn’t act.” You can check it out here. Next to the clock is a payroll tax calculator, which lets everyone see how the payroll tax affects them.
The debate over the extension of the payroll-tax cut has made for some strange bedfellows. Last Friday’s U.S. News and World Report’s debate club is a good illustration of this point. In it, I made the case I have made at the Corner before: that extending the payroll-tax cut without equivalent cuts to Social Security benefits is just another promise, a transfer of money to seniors that will have to be paid for by future generations. (The White House clock, by the way, does not calculate that cost to our children.)
Obviously, I am under no illusions that lawmakers will do the right thing and cut spending as they cut the payroll tax, but thankfully, there is a silver lining to this mess (hope springs eternal):
The good news is that this should expose the fiction that Social Security benefits are fully backed by payroll-tax contributions, and hence, can’t be reformed. Social Security is already running a cash-flow deficit, meaning there is not enough money to pay retirees’ benefits. With the payroll tax cut extension adding to the program’s financial difficulties, it may be the impetus for Congress to pursue fundamental entitlement reform and address the underlying drivers of our debt problem.
My hopeful position puts me in the pro-tax-cut-extension camp, which is interesting because most of the “Debate Club” participants on that side are believers in the idea that the payroll-tax cut will be spent by workers rather than saved, stimulating the economy. I totally disagree with this Keynesian understanding. In fact, I agree instead with this piece by the Cato Institute’s Chris Edwards, who makes the case that Keynesian policies have failed and this one will be no different:
Some of the same Keynesian macroeconomists who got it wrong on the recession and stimulus are now claiming that a temporary payroll tax break would boost growth. But as Stanford University economist John Taylor has argued, the supposed benefits of government stimulus have been “built in” or predetermined by the underlying assumptions of the Keynesian models.
The whole “Debate Club” is here.