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November 30th, 2011 4:33 pm
GOP Offering to Trade Federal Pay Freeze for Payroll Tax Cut Extension
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With the end of the year only about a month away, Republicans on Capitol Hill are stuck in a bit of a quandary. Under current law, the dawning of 2012 will bring with it the expiration of the payroll tax cuts passed last year, which dropped employee rates from 6.2 to 4.2 percent.

As I’ve written before, the payroll tax cuts get you less bang for your buck than virtually any alternative. The  savings for an average American are about $40 per paycheck — not nothing, but certainly not enough for even the most dyed-in-the-wool Keynesian to think aggregate demand will shift, particularly because the program’s temporary nature means that it is not altering long-term plans. Also, remember that the payroll tax is there to finance Social Security and Medicare, so pulling money out of those accounts only hastens the day of fiscal reckoning for both of those programs. Finally, there’s the fact that there’s only a cut to the employee’s chunk of the payroll tax, not the employer’s. That means it does absolutely nothing to galvanize hiring.

Savvy congressional Republicans have made these points, but voting to end the break would put them in the unusual position of defending an increase in taxes at a time of extreme economic weakness. While the payroll rate will eventually have to return to the status quo, the GOP is thus stuck looking for something to plug the hole in in the interim.

Kudos, then, to the Republican leadership, who, according to Politico, are looking to pay for the continued tax break by extending a salary freeze for federal employees and lawmakers, a move that would save about $100 billion. While the country’s biggest economic need is a wholesale overhaul of tax policy and regulatory policy combined with a dramatic reduction in federal spending, that won’t happen in the current atmosphere of political polarization in Washington. If we have to muddle through in the interim, this is a fairly reasonable way to do it — don’t increase the debt and let the Washington crowd foot the bill for the everyday Americans they’ve so badly misserved.

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