Democracy in America

American politics

Payroll tax cave-in

Mister Cratchit!

Dec 24th 2011, 12:41 by M.S.

THE argument that Scrooge was right about Christmas is probably not going to be a winner, either with conservatives or the general public, and I do not expect to see much more of it. It would be interesting if old Ebenezer replaced John Galt as a pro-inequality standard-bearer for a while, just to relieve the tedium, but I worry that when people on the internet start running with this one, it signals that we have so far passed the point of Peak Contrarianism that we are literally running out of obvious commonly held true statements to provocatively deny. "People should be generous to the poor on Christmas. Or should they???" Yes, they should.

In other news, House Republicans caved in and approved a two-month extension of the payroll-tax cut. Charles Krauthammer is right that making tax policy two months at a time is a terrible idea. But the question is what the longer-term implications of the cave-in will be. And what's interesting about Mr Krauthammer's column is that he employs language I never would have expected to see a Republican use when speaking about a tax cut.

When George McGovern campaigned on giving every household $1,000, he was laughed out of town as a shameless panderer. President Obama is doing exactly the same—a one-year tax holiday that hands back about $1,000 per middle-class family—but with a little more subtlety...This is a $121 billion annual drain on the Treasury that makes a mockery of the Democrats’ reverence for the Social Security trust fund and its inviolability.

The Republican talking point on tax cuts is supposed to be that it's the people's money, and talking about a tax cut as a "drain on the treasury" presumes that the money people earned really belongs to the government. In the debate over the payroll tax cut, this attitude has somehow come unglued, and it's hard to understand why.

Jonathan Chait's thesis is that the underlying shift is increasing Republican concern that people in the bottom half of the income distribution pay too little in taxes. This idea has been kicking around conservative think tanks and the Wall Street Journal for a few years, and reached probably its broadest popular expression in the tea-party movement's "We Are the 53%" (i.e. those who pay income taxes) response to the Occupy Wall Street movement's "We Are the 99%" slogan. Another possibility is that Republicans are so strongly driven by a partisan desire to deny legislative victories to the president that they are willing to torpedo even conservative-friendly policies.

Without some such theory, it becomes hard to explain the GOP's stances during the payrol-tax-cut debate. Republicans tried to insist that the payroll-tax-cut extension be paid for with cuts in spending, while they had never insisted that the extension of the Bush-era income-tax cuts for high earners which they won earlier this year be paid for. They insisted they would approve the tax cut only if it included approval of the Keystone XL pipeline. They now argue that the problem with the payroll tax cut extension is that it's too short, even though Democrats would have been happy to extend the cut for a year. In general, they treated the payroll-tax cut as if it were one of the opposing side's priorities, which they would be willing to approve only if they received some goodies in return.

If the cave-in on the payroll-tax cut was just a matter of botched strategy and callow, impetuous tea-party freshmen learning the ropes, then Republicans may be able to regain their footing and start dominating the Congressional agenda again next year. But if the actual problem is that the GOP is now only interested in tax cuts for the wealthy, and not for the poor, that is a political problem that will trouble them long past Christmas.

Readers' comments

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bfh3

I'm curious to see what the Obama apologists here think of his hypocrisy on raising the debt ceiling once again, after referencing the similar debate about it in 2006 as a "failure of leadership" on the other side. Indeed, Mr. President.

It's amazing how some have the nerve to act surprised at the exceptionally poor results this administration has produced. It's because the country elected a 24/7 campaigner, not a leader, and it shows.

Really folks? Still blaming Bush after 3 years? That's pathetic.

rewt66

Here's the thing about the Republicans. They're for lower taxes, true. But they're also for lower deficits. (Yeah, I know, they lost their purity on that one during Bush. But there are signs that they are recovering their sanity on this front.) And if you cut the payroll tax but don't cut the SS obligations, you've got a big addition to the deficit. Republicans - normal Republicans, not the Bush-tax-cut version - have a problem with that, a problem that's not just "anti anything Obama does" or "let's stick it to the poor". It's a genuine ideological problem for them.

And wow, the level of bile and mud-slinging by a number of posters here. A bunch of you sound like you need to have your meds adjusted.

g cross

@ RR: "I'm MS's arch-nemesis."

I am sure that you like to flatter yourself that way. :-)

hedgefundguy

Funny how the knuckleheads of both parties and their "columnists" continue to focus on Federal taxes.

I just put a check in the mail for my property taxes.

Up 9.4% year over year.

Regards

Omricon

Why does MS seem to almost exclusively reply to RR? They both make good points but so do others, do you have a conflict of interest to declare MS?

RestrainedRadical in reply to Omricon

I'm MS's arch-nemesis.

@k.a.gardner, "MS and RR are like two old women who constantly bicker between themselves."

Or the Joker and Batman.

@jouris, yes, keep deductions for existing mortgages and eliminate it for future mortgages for the life of the mortgage or mortgagor, whichever comes first.

@dumaiu, yes, that's my point. Taxes and benefits should be managed together. Means-testing through tax filings isn't hard. With sufficient revenue and controlled costs, means-testing is unnecessary but we have neither.

@RestrainedRadical seems to agree that "keeping deductions for existing mortgages and eliminate it for future mortgages" would be a sound plan.

The law of unintended consequences is the devil for this kind of thing. I was in the UK at the end of the 80s when they did a similar thing (not as much, just effectively cutting the allowance in half). The problem was that they gave about six months notice, as I recall.

So, what happened in those six months? Well, everyone without a mortgage (or thinking of moving up) realized that if they bought a house before the deadline they could lock in savings. Result? BIG spike in house prices (about 25%+ in 6 months).

You can probably imagine what happened next; suddenly the effective cost of buying a house went up significantly (plus the normal cycle of buyers instantly disappeared since they had already bought). Result; anyone who needed to sell could probably only do so at a significant loss. Prices dropped by more than the 25% they had gone up by, and took literally years (about seven as I recall) to recover. Yuck.

Far better to have a 'death of a thousand cuts' on this one, applicable regardless of when the mortgage was taken out, e.g. cut value by, say 5% per year using some kind of tax credit that eludes me for the moment. Then again, THAT might have some kind of consequence I can't predict either!

I disagree with your assertion that a housing spike would be a good thing; although it *sounds* good, the ensuing and (in my opinion) unavoidable subseqent reduction would be painful.

Second, by keeping the deduction for existing mortgages you are still creating the 'rush to buy', unless you provide zero notice (or close enough to it), which given the political system in the US seems improbable.

I'd argue that a slow phase out with no 'trigger date' is probably the least market-distorting approach.

blue asgard

It all goes to support my hypothesis that the tea-partyists are Fascist at heart.

Fascism, as I'm sure many readers will know, was defined by George Orwell as the politics of the bully. What he actually wrote was this: ‘Except for the relatively small number of Fascist sympathizers, almost any English person would accept ‘bully’ as a synonym for ‘Fascist’. And the essence of bullying is to collapse your empathy for the bullied. If you do have empathy for the bullied you'll be disarmed as a bully. The same applies to Fascism. Hitler succeeded in collapsing his followers empathy for a particular human tribe - the Jews. As a result he succeeded in establishing a particularly egregious form of Fascism in his country.

By contrast 'St' Paul made Christianity into the exact opposite - an empathy bomb intended to destroy Roman Fascism, which oppressed his country (he was a Roman Citizen but born a Jew). This is what the exhortations to 'love thine enemies', 'do good to those who would do evil unto you', and 'turn the other cheek' would encourage, if people genuinely adhered to them. How could you be a Fascist if you empathised like that with your victims?

Arguably you shouldn't call yourself a Christian if you don't but who - really - does this? Well, the tea-partyist would say they were Christian -indeed fundamental Christianity, with its very un-Christian attitudes towards non-fundamentalists, seems to be bound up in what passes for their philosophy (maybe that's a word with too many letters for what they believe in).

Well, the Christians have the saying that ‘by their fruits shall ye know them’..

Apparently, on the day that the Obamacare bill was passed, a bunch of tea-partyists in Philadelphia came across a man begging in the street. He had Parkinson’s disease, no healthcare and no money. Far from showing anything remotely like the Christian charity Americans claim to be proud of, these tea-partyists proceeded to abuse this beggar, at first verbally, advising him that he ‘was in the wrong part of town’ for this sort of thing, then they started kicking him. Eventually someone stepped in, claiming to ‘buy this man’ and showered one dollar bills all over him. It was not exactly a charitable gesture but at least they stopped there, maybe interrupted because someone recorded the whole thing on their camera-phone and the footage went up on a website. ‘By their fruits shall ye know them’, indeed!

I can just imagine the famous 3 a.m. conversation if a tea-partyist (TP) were ever to take the White House. (This assumes of course they don’t self destruct at the next election.)

Official (on the line): ‘Mr President, The North Koreans have just bombed the Seoul stock exchange with a dirty one-ton nuke! What do we do?’

TP: ‘Well, that’s them well in the soup! Wun-tun, you say! Where is Sole anyway? In Scotland? They’ve got some pretty fishy politicians down there, you know, Salmon and Sturgeon, and the like. I guess they must come from Sole. Makes me hungry, just thinking about all that food.’

Official : ‘Seoul is in South Korea, Mr President. So, what do we do?’

TP: ‘Oh, Nuke ‘em both! There is a North Korea, right? Now I think about it, Nuke everyone! If that doesn’t fix it, call me in the morning. We don’t do PC in this White House. Meantime send me up a midnight snack, and no more interruptions! Fish soup, indeed! Yeah, that’d be great, make it – Alaskan Salmon Chowder! With all the trimmings! Yummy!”

Official: ‘But Mr President..’

TP: ‘You’ve heard of a Presidential Order haven’t you? Well, that was one! Nothing like firm leadership. Night-night.’

Official: (Aghast) ‘He’s hung up!’

(From 'The Devil’s Guide To Politics’ by Nicholas Dunraven)

Beware of what you wish for.

lapin229

Do you think this government represents you or just them$elves. We can expect four more years of this kind of behavior, regardless of who becomes president.

AKPAN54

To be fair, the bigoted, extremist fruitcakes that now control the Republican party made their agenda quite clear from the outset: to undermine Obama (who was never really American in their view - hence their so-called "birtherism") and to ensure he doesn't get a second term. So determined were they that they were willing to allow the country they love so much to default on its debt obligations (in clear violation of the Constitution they cite so often) and commit economic suicide.

But the problem, as I see it, has been the nature of the response from "mainstream" America who, when not blaming Obama for so-called "Tea Party" obstructionism, react half-heartedly, incoherently and too belatedly to make any real impact (e.g., the "Occupy" protests).

Personally, although an Obama supporter, I never thought it was a good idea for him to run for the presidency when he did. The legacies of Bush and Cheney were too much of a poisoned chalice for anyone to inherit. And in Obama's case (who never really enjoyed much support amongst white voters, further illustrating why he shouldn't have stood), it's hard to see how he can reverse that catastrophic legacy even after a second term, with the ugly, hate-driven obstructionism that now defines Congress. And so, he seems destined to be remembered, quite absurdly, as a failed president.

The reality, alas, is that racism still defines America despite appearances, and much of the obstructionism in Congress is driven by it. Which is almost certainly why Colin Powell declined to contest for the presidency some years back, in spite of his apparent popularity at the time.

WT Economist

What you fail to understand is that when tax rates and burdens are discussed, the Republicans assert that the payroll tax is not really a tax. It is an insurance payment for which ordinary Americans receive a very valuable benefit as a right.

But when spending is discussed, those very valuable benefits are not in fact rights according to the Republicans, but are in fact welfare payments to the lazy undeserving at the expense of the hard working, moral, productive people.

Anakha82

@M.S.: "In general, they treated the payroll-tax cut as if it were one of the opposing side's priorities, which they would be willing to approve only if they received some goodies in return."

There you go. I think at this point the Republicans would demand concessions if Obama nominated Jack Welch to the NLRB.

hikeandski

The problem is government spending not revenue. Cut spending, not raise taxes. It is that simple.

mmdaggy in reply to hikeandski

The funny thing about that is when you start taking about specific programs, they seem to be someone's sacred cow. If people want and expect services from the government, they should be prepared to be taxed accordingly. These services don't come from nowhere (there is no free lunch). Does that mean that there is no fat whatsoever to cut from the budget? Of course not, I would in fact recommend cutting some of the waste in Defense which would probably yield plenty.

teacup775 in reply to hikeandski

It might also help if the larger public enjoyed prosperity growth. The American habit of short term gain has bred a blindness to the idea that a strong cultural (social and business sentiment) away from debt driven consumerism would encourage long term prosperity. Laws and policies to blunt the use of debt, public and private won't sail because we need to molly coddle the tail wagging dog finance sector smothering all other concerns. It doesn't help that most other consumer driven corporations are amoral constructs who would never lobby for this policy to promote national weal. Business is global. They have no homeland or injunction to care.

Bluecrab

"Moderate Republicans are not too happy with the Tea Party."

Yes... in a recent survey, 11 of the 14 moderate Republicans nationwide expressed dissatisfaction with the Tea Party.

martin horn

Tax cuts pay for themselves...unless the Democrats propose them.

In which case, duh, cutting tax rates cuts revenue, you idiot!

A. Andros

The issue here is Social Security, not whether the GOP "caved." The Democrats have subtly begun to cut the ground out from beneath SS.

FDR insisted that the employee contribution show up as dollar amount on each paycheck so that the worker know money was taken directly from him with the promise to return it at age 65. He felt this would make it impossible to reverse SS benefits and he was right -- until now. By largely exempting a couple years' income from the SS tax, the Democrats have shoved the ordinary worker off the moral high ground. That worker can no longer insist "I paid into the System so I am entitled to take full benefits out" because as of now he is NOT paying into the System.

Since the payroll tax cut extension puts a huge hole in the SS fund, this means general revenues must be tapped. And, general revenues, unlike the SS tax, can be cut as part of any budget negotiations. This whole business is a sneak attack by the Democrats on the fiscal and moral basis of old age insurance. Enjoy the tax cut, workers -- you'll pay for in spades down the road!

bswift in reply to A. Andros

Newsflash - boomers and seniors age 45 and up are 60% of the US voting population. Social Security will be there.

Workers are still paying 4.2% of their income, and their employers are paying another 6.2% from their compensation, so it is silly to suggest "he is NOT paying into the System."

As for your contention that Democrats have a sneaky plan to cripple Social Security, anyone who bothers to read these blogs knows that is too ludicrous to need answering.

A. Andros in reply to bswift

Personally, I don't really care about future changes in SS -- at my age the benefits are in the bag for life. I do know, however, that the future is problematic for this program: too many retirees in the future, not enough workers. I spent a lifetime in insurance and found out that the actuaries, sadly, are almost always right.

I don't mean imply that there is a conclave of Democrats trying to subvert SS. But, there will be a revenue gap in a couple of decades and that means either raising SS taxes or cutting benefits (or both.) Cutting benefits is now a more viable option because of the precedent just established that working populations have NOT consistently paid into the program. And, to repeat, the funding "hole" caused by this tax-break starts the process of making SS dependent on fickle general revenue bills.

I know there are a lot of voters over age 45 -- I am one of them. Regrettably, there is not enough money for these people when the time comes for them to collect SS in a few decades. The difference has to be bridged somehow and my guess that bridge will be a cut in benefits -- for which a ready-made rationale now lies at hand.

These things evolve, once a precedent is established. The original income tax rate was only 1%. A few decades later, once a precedent was established, it ran as high as 90%. Well, future generations will have to decide whether it was "too ludicrous to need answering" . . . or a first, small step from degrading SS was taken while every right thinking citizen's eye was elsewhere. As for the argument, "Social Security will be there," that is entirely correct. The questions are "for whom" and "in what amount" and "under what circumstances." A bit more slippery, all that.

jouris in reply to A. Andros

Let me understand you here.
- The Democrats created Social Security, with features to make it hard to reverse.
- The Republicans have spent the last few years championing "privatizing Social Security," i.e. getting rid of it.
- Therefore the Democrats are the ones now seakily trying to get rid of it?

Somehow, the logic excapes me.

bampbs

Let me explain it to you, MS. A Republican talking about taxes or fiscal responsibility is a liar, a hypocrite or both. Class war by the wealthiest against almost all Americans, the raw economic interest of the very top of the heap - these are the unvarying aims that direct the GOP's shamelessly contradictory tactical contortions.

But you can't fool all of the people all of the time. They have gone much too far, and it may be too late to backpedal. I think it was already too late once the House passed the Ryan Republican Suicide Budget.

ShrNfr

Given that the House had passed and sent to the Senate a bill that extended the FICA reduction and unemployment and Medicare payment fix for a full year, it is hard to see why they should have to adopt a neutered bill that only extends it for 2 months. After 2 months, Mr. Reid will again attempt to play political games. The liability for the deadline fiasco is totally Mr. Obama's and Mr. Reid's. To say otherwise is to ignore the fact that the Senate could have made minor modifications to the House bill and then finished it off in conference. Me thinks the press doth posture too much.

RestrainedRadical

There's no argument that the mortgage interest deduction is bad policy but at this point, for many, it's a form of welfare, a housing subsidy, which isn't the worst thing to have right now. People struggling to pay their mortgage right now depend on it. I would prefer to convert it into a general means-tested tax credit but if that can't be done, I might support keeping it in place just as I would prefer to reform Social Security and Medicare but if the choice is between keeping it as-is or abolishing it, I would elect to keep it.

RestrainedRadical in reply to Hamakko

Weaning people off still means some people will have to move out or make do with less. Doesn't seem fair for people who organized their home-buying with the deduction in mind. Instead of a phase-out, I'd end the deduction immediately for future mortgages and keep it for existing mortgages for the life of the mortgage or the life of the mortgagor. And any future tax cuts should be offset with a decrease in the MID so that it's tax-neutral for homeowners.

I think this is how we should deal with government benefits in general. I.e., keep it for current beneficiaries under the same terms, eliminate it for future beneficiaries, and offset tax cuts with cuts in benefits.

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In this blog, our correspondents share their thoughts and opinions on America's kinetic brand of politics and the policy it produces. The blog is named after the study of American politics and society written by Alexis de Tocqueville, a French political scientist, in the 1830s

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