I’m fascinated by the coverage of the expiration of the payroll tax cuts this morning; it is being treated as major failure of Congress and the president, and a bit of fiscal doom for the New Year.
Amy Davidson writes in The New Yorker:
Cuts to the already highly regressive payroll tax are being allowed to expire, meaning that they will rise from 4.2 per cent to 6.2 per cent. Obama didn’t even fight for them. In his statement Tuesday night, Obama described the bill as “preventing a middle-class tax hike” that could have hurt families and sent the country back into a recession; that is true, but it allowed another middle-class tax hike that could have the same effect. He also said that middle-class families “will not see their income taxes go up.” That is false, unless one goes along with the idea — and most of Washington does — that payroll taxes, which are on income and levied by the federal government, are not federal income taxes.
But was there ever any serious discussion of extending the payroll tax cut? As the AP notes, “it was never fully embraced by either party, and this time around, there was general agreement to let it expire.”
Maybe the expiration of the payroll tax cut really will amount to a significant economic hit in 2013:
The so-called payroll tax is scheduled to bounce back up to 6.2 percent this year from 4.2 percent in 2011 and 2012, amounting to a $1,000 tax increase for someone earning $50,000 a year.
“It’s a huge hit,” says Joel Naroff, president of Naroff Economic Advisors. “It hits people whether they’re making $10,000 or they’re making $2 million. It doesn’t matter who you are . . . The lower your income, the more of your income you’re (spending). So if your taxes go up, it’s going to come out of your spending.” And that is bad news for an economy that is 70 percent consumer spending.
Mark Zandi, chief economist at Moody’s Analytics, calculates that the higher payroll tax will reduce economic growth by 0.6 percentage points in 2013. The other possible tax increases — including higher taxes on household incomes above $450,000 a year — will slice just 0.15 percentage points off annual growth, Zandi said.It was designed to be temporary.
As a guy who prefers to pay as little in taxes as legally possible, I’m not happy to see the payroll tax go up. Heck, I wanted the entire tax suspended entirely back in 2009. But this 2 percent cut was always designed to be temporary; if anyone in Washington wanted the tax rate permanently lowered to 4.2 percent, they should have introduced legislation to do that and passed that.
Perhaps this — along with the rest of the fiscal cliff-hanger — will be a useful lesson about “temporary” tax changes. Congress usually enacts them to provide a spark to the economy, and intends to end them once the economy is in better shape. But the economy is rarely in such great health that taxes can be raised without some sort of deleterious impact; as we may experience, taxes jump back up before there’s a robust recovery and the hikes cause the economy to sputter again. (In this light, the permanency of the Bush tax cuts for those making less than $450,000 per year may be one of the most significant economic reforms in the recent era.)
Either way, as no less an Obama-friendly entity than The New Yorker has declared, President Obama has now raised taxes on all working Americans.
UPDATE: What happens when Obama returns from Hawaii and takes a victory lap for this deal, telling the American public that he saved the Middle Class tax cut, prevented millions of Americans from losing much-needed tax relief, etc., at the precise moment they’re finding their paychecks are 2 percent smaller?