Leaving aside the benefits of Social Security for a moment, the payroll tax is exactly what it sounds like: a tax on employment.
And given that it’s regressive (it’s not paid on salaries above $100k) and the fact that it limits take-home pay (and thus consumption spending) there’s interest from both sides of the aisle in instituting some kind of payroll tax holiday to stimulate the economy.
Ex-Bush aide David Frum suggested this approach on a recent episode of Hardball, and the The New Yorker’s Hendrik Hertzberg deems the suggestion “not insane,” which is probably the nicest comment ever made about a Bush guy in the pages of The New Yorker.
If the economic crisis necessitates a second stimulus—and it probably will—then a payroll-tax holiday deserves a look. But it’s only half a good idea. A whole good idea would be to make a payroll-tax holiday the first step in an orderly transition to scrapping the payroll tax altogether and replacing the lost revenue with a package of levies on things that, unlike jobs, we want less rather than more of—things like pollution, carbon emissions, oil imports, inefficient use of energy and natural resources, and excessive consumption. The net tax burden on the economy would be unchanged, but the shift in relative price signals would nudge investment from resource-intensive enterprises toward labour-intensive ones. This wouldn’t be just a tax adjustment. It would be an environmental program, an anti-global-warming program, a youth-employment (and anti-crime) program, and an energy program.
Impossible? A politically heterogeneous little group with the unfortunately punctuated name of Get America Working! has been quietly pushing this combination for 20 years. In one form or another, without much fanfare, it has earned the backing of such diverse characters as Al Gore and T. Boone Pickens, the liberal economist James Galbraith and the conservative economist Irwin Stelzer, Republican heavies like C. Boyden grey and Democratic heavies like Robert Reich. It’s ambitious, it jumbles ideological and partisan preconceptions, and it represents the kind of change that great crises open political space for. Does that sound like anyone you know?
On the broadest level, we like the idea and think taxing employment is a mistake when employment is the one metric that most people care about.
But the issue isn’t actually the payroll tax. The issue is entitlements. Unless you really overhauled Social Security and Medicare, a payroll tax holiday would merely be yet another scheme to shift the burden of taxes to future generations, all for our short-term benefit. And judging by the rhetoric from Frum and others, it doesn’t sound like they’re pushing for a major overhaul. The word “holiday” doesn’t typically connote major, lasting change.
Hertzberg seems to get this, though his answer is about replacing the payroll tax with a bevy of other taxes. Essentially, we’d have some gigantic scheme to pay for elders’ retirement and their healthcare, employ more youth, and fight global warming.
Either that sounds wonderful to you or it sounds like a gigantic bloody mess.