By Mike Lillis - 07/19/11 10:00 AM EDT
Liberal Democrats are stepping up their attacks on President Obama for his plan to extend a payroll-tax break by a year.
Rep. Peter DeFazio (D-Ore.) blasted Obama last week for his “stupid Social Security tax holiday,” arguing that the money would be better used on more stimulative spending.
“It’s a unique tax break,” DeFazio said Friday. “You don’t just give away money, you have to borrow money to give away money, to restore the Social Security trust fund. If you’re going to borrow $110 billion, spend it on infrastructure [and] put 4 million people to work instead of pissing away 25 bucks a week, which is what we’re doing now.”
The fight over the payroll cut replays a debate from December, when Obama and Senate Republicans cut a deal to slash workers’ payroll taxes from 6.2 percent to 4.2 percent this year as part of a larger package to extend the George W. Bush-era tax rates.
With unemployment hovering above 9 percent — and with Obama facing a tough reelection campaign — the White House is hoping that an extension of the payroll-tax holiday will help jumpstart the sluggish recovery. The provision is being viewed as perhaps the only stimulative measure capable of passing as part of a larger package to increase the nation’s $14.3 trillion debt limit.
Republicans who supported the payroll-tax break in December are balking at extending it. House Budget Committee Chairman Paul Ryan (R-Wis.), for instance, said it would be an economic “sugar high” without any long-term benefit.
Among Democrats, DeFazio is hardly alone in his criticism of Obama’s plan. Last month, Reps. Lloyd Doggett (Texas), Ted Deutch (Fla.) and Mark Critz (Pa.) penned a letter to fellow House Democrats urging their opposition to any additional payroll-tax breaks for fear of eroding Social Security.
“Social Security’s popularity comes from the direct contributions of American workers, who pay into the system now and benefit when they retire or become disabled,” they wrote. “Unless and until faith in Social Security has been restored to the American people through long-range solvency, short-sighted cuts to the program’s revenue stream must not be part of any debt-ceiling or budget deal.”
The Congressional Budget Office estimates the tax holiday now in place will reduce federal revenues by $112 billion over the next two years — money the government will have to borrow to refill the resulting hole in the Social Security Trust Fund.
Dean Baker, co-director of the Center for Economic and Policy Research, a liberal policy shop, said, “in principle,” there’s nothing wrong with paying Social Security benefits using general revenues. But politically, the change “puts the program in very serious difficulties.”
“There’s very good cause to worry about [the payroll-tax holiday],” Baker said. He warned that tax cuts — even temporary tax cuts — are often extended because their expiration can be opposed as a tax increase.
“Democrats don’t do well arguing for tax increases,” Baker said, referring to the Republicans’ December victory extending the Bush tax rates for the wealthiest Americans. “If the point is just to put this money in people’s pockets, we could do it in a way that doesn’t bring Social Security into it.”
Obama has endorsed an extension of the payroll-tax cut as recently as last month, when he argued that such a plan “puts money in people’s pockets at a time when they’re still struggling to dig themselves out of this recession.”
Although the cut is just 2 percentage points — from 6.2 percent to 4.2 percent — it represents a real payroll-tax reduction of 32 percent. A worker earning $100,000, for instance, paid $6,200 in payroll taxes in 2010, and would pay $4,200 in 2011.
The White House also is considering a reduction in the 6.2 percent payroll tax paid by employers, who were not included under the current cut.
Sens. Chuck Schumer (D-N.Y.) and Orrin Hatch (R-Utah) have offered their own variation of the tax-cut extension. Their proposal would slash payroll taxes for businesses that hire workers who have been unemployed for more than 60 days.
Ethan Pollack, senior policy analyst at the liberal-leaning Economic Policy Institute, said the payroll-tax holiday for workers is valuable for enhancing consumers’ spending power. Spreading the tax cut over a year — rather than distributing lump tax rebates, as Bush did — also encourages consumers to spend more, he noted, because many workers won’t recognize that the income hike is temporary.
“People notice their change in income, but they don’t necessarily know why,” Pollack said. “It’s horrible politics — because you want to take credit for [putting] more money in people’s paychecks — but pretty decent policy.”
Both Pollack and Baker hammered the notion of extending the payroll-tax break to employers, arguing that it would do little to encourage businesses already flush with cash to hire new workers.
“They’re already sitting on tons of money,” Baker said. “Why, if you gave them more, would they hire people?
“You’re just throwing money away.”