The Corner

The Payroll-Tax Debacle

The deal to extend the so-called payroll-tax cut is being hailed as a fair compromise by many in Washington. In reality, it represents Washington at its worst. The deal once again highlights the triumph of short-term political expedience over the best long-term interests of the country, and should remind the 91 percent of Americans who don’t have a high opinion of Congress why they are right. 

First, the agreement is an act of intergenerational theft — stealing from seniors and our children. 

Instead of finding $100 billion of savings in our grotesquely bloated budget, the White House and Congress took the easy way out and borrowed the money. What makes this inexcusable is how easy it should be to go after major savings. For instance, the Government Accountability Office has identified at least $100 billion in annual waste and duplication in the federal budget. GAO will release another report at the end of the month that will likely put that figure even higher. The White House and Democrats in Congress made zero effort to use those suggested offsets because they viewed doing so as an abstract ideological goal. But living within one’s means is not an abstract ideological goal. It is a fact of life for millions of families who don’t have the power to borrow money on a whim. 

To make matters worse, that $100 billion was borrowed in perhaps the most destructive way imaginable. The agreement robs $100 billion from Social Security with the hope that China and other creditors will loan us the money to replenish that fund and pay Social Security benefits in the future. The problem with Social Security, of course, is that the trust fund is already depleted. Social Security is running a cash-flow deficit that will total $630 billion in 2021. Social Security is not in a position to fully fund its own benefits, much less gimmicky election-year stimulus spending disguised as a tax cut.

Speaking of tax cuts, the deal is not really a tax cut at all, but a deferred tax increase that will needlessly add to our national debt and further depress job creation. We’ll have to borrow the money, at interest, that we have stolen from Social Security. Plus, our economy is so overleveraged that borrowing money for stimulus spending has a negative multiplier effect. Economists Carmen Reinhart and Kenneth Rogoff explain that when debt equals 90 percent of GDP (our debt is currently at 100 percent of GDP) economic growth slows by about one percentage point of GDP growth per year. If normal growth is three or four points per year, a one-point slowdown means we are slowing our economy by 25 to 33 percent. Former Obama-administration economist Christina Romer estimates that each point of GDP growth represents about one million jobs. Therefore, slowing our economy by one point of GDP means one million jobs are not created. 

If the goal of this agreement was to put more money in people’s pockets, sending them a check would have been the best course. But that wasn’t the primary goal. The primary goal was to play election-year politics and embarrass Republicans.

For months, Republicans have lamented that President Obama has stolen the tax issue and outmaneuvered them politically. They are correct. The best response, though, is not to repeatedly capitulate and feign victory but to lead with a bold, compelling, and comprehensive tax-reform plan that will put more money in people’s pockets than President Obama’s too-clever-by-half payroll-tax cut that cannibalizes Social Security. 

The fact that Congress has not reformed the tax code in 25 years — since Reagan’s historic 1986 reform — is a disgrace. Both parties have had a schizophrenic approach to reform that says, “I support simplification; give me complexity” and have kept rates artificially high by defending their favorite loopholes and deductions. 

A bold tax-reform proposal that wiped out today’s code could cut rates in half for millions of Americans and would transcend today’s small-ball debates about the payroll-tax cut and even the Bush tax cuts. The Simpson-Bowles proposal, which received bipartisan support, suggested lowering today’s rates of 15, 28, and 35 percent to 8, 14, and 23 percent. Reducing spending inside and outside the code could push rates even lower and would spur tremendous innovation and job creation.

President Reagan called his tax-reform act “the best anti-poverty bill, the best pro-family measure, and the best job-creation program ever to come out of the Congress of the United States.” He was right. Even more telling was what Reagan said after he signed the measure. “I feel like we’ve just played the World Series of tax reform,” he said. “And the American people won.”

It’s about time we win another victory for the people, not the politicians. Twenty-five years is long enough.  

— Senator Tom Coburn, M.D., is a member of the Senate Finance Committee.


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