The Campaign Spot

Why No Talk of a Payroll Tax Suspension?

Jen Rubin is at least partially right — by not being a flaming extremist, Barack Obama is leaving the Republicans limited space to forge their post-2008 identity.

Since the top agenda item of the incoming Obama administration is the stimulus bill, the Republicans need a clear alternative vision. What should Republicans do? There are two good options and one bad one.
Good option one: They propose their own alternative plan, it’s more popular than the Democrats’, the non-liberal Democratic members switch over, and they actually make the first and biggest economic legislation coming out of a heavily Democratic Congress their own.
Good option two: They propose their own alternative plan, and it’s about as popular than the Democrats’, but the Democrats ignore the GOP plan and ram their trillion-dollar spending package through. That looks like a defeat, but it also means that as of that moment of passage, Obama and the Democrats own responsibility for the economy. With each passing month that recovery doesn’t arrive, the GOP can say, “had they passed our plan, we would be in better shape.”
Bad option: Enough GOP members sign on to the Democrats’ bill and they share ownership of the economy, and are both blamed if there’s no recovery. If there is a recovery, we know who the MSM will credit.
So what should the GOP plan be?
Suspending the payroll tax for 2009. John Makin, former Treasury consultant, writing at AEI:

The best available fiscal policy measure would be a sharp reduction in the payroll tax, which would boost household disposable income while giving firms an incentive to retain more workers on their payrolls. Total annual collections from households and firms of payroll tax levies total about $625 billion, about 7 percent of disposable personal income. A payroll tax is labeled as the primary means to finance Social Security and Medicare benefits, but those benefits are financed out of government revenues and would, of course, continue to be provided at their full level. The payroll tax is a poorly designed fiscal measure because it acts as a tax on employing labor and, in times of falling demand, a tax on retaining labor. The payroll tax is the primary tax paid by more than 60 percent of American households and so constitutes a marginal disincentive to further work.

If the payroll tax (of which households pay half directly) were suspended- — say, for a year or eighteen months — -households would experience an immediate 3.5 percent increase in disposable income that they could employ to sustain consumption and pay down debts. Since the payroll tax is regressive, falling more heavily on lower income households, its repeal would be progressive, while transferring a substantial increase in disposable income to the low-income households who are likely to need it most and therefore likely to spend most of it.

For firms, a reduction in their payroll tax payments would reduce their incentive to lay off workers by reducing the cost of keeping workers on the payroll. In effect, firms would be prompted to shift more toward labor as a factor of production because of a reduction in the tax on employment of labor that the payroll tax entails.

A payroll tax holiday is a radical measure. Opponents will claim that it constitutes a threat to maintaining Social Security and Medicare benefits. That claim would be unfortunate and untrue. The federal government is obligated to pay retirement and medical benefits whether it finances them out of a payroll tax, an income tax, or by additional borrowing, which would be the case in current circumstances. The sharp rise in disposable income that would result from a payroll tax holiday would constitute a far more effective fiscal stimulus than many of the other measures currently under consideration.

It would cost a lot. But then again, Democrats are talking about spending about $1 trillion on mobster museums and new guard rails for Maryland, etc. If that money’s gonna be spent, better our way than their pork-to-donors way.

The payroll-tax suspension is simple and elegant, it can be explained in 30 seconds, and I’d bet it would be wildly popular.
And even if it doesn’t pass, the GOP position is bold and clear, and they can blame every economic woe on Obama and the Democrats’ refusal to consider their alternative . . .

Rich mentioned it earlier, and I can’t understand why it isn’t catching on.

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