There's Part Of The Fiscal Cliff That Hits Workers Directly — And Almost Nobody Is Talking About Fixing It

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The primary focus of the Fiscal Cliff negotiations is the Income Tax. Liberals want the rate raised for high earners. Conservatives don’t.The next concern is the sequestration, and in particular the cuts that will befall the defence industry.

Getting almost no play, however, is the payroll tax holiday.

In a recent Slate piece, Matt Yglesias explained the law that’s at stake:

The last—but by no means least—element is the payroll tax holiday. In the 2009 stimulus bill, the Obama administration included a $400 “Making Work Pay” tax credit. Republicans didn’t want to extend that policy during the last lame-duck session, mostly because it was too closely identified with Obama, but they agreed to a similar idea: a payroll tax holiday that reduced workers’ share of Social Security taxes from 6.2 per cent to 4.2 per cent. The idea of the payroll tax holiday was to give a boost to the economy in a form that’s ideologically congenial to Republicans and doesn’t risk becoming a permanent expansion.

He went on to describe some of the stakes if the holiday isn’t extended

Josh Bivens and Andrew Fieldhouse of the Economic Policy Institute estimate that the employment impact of rescinding the payroll tax holiday will be larger than the impact of letting all the Bush tax cuts expire. Jan Hatzius, chief economist at Goldman Sachs, says ending the holiday would shave 0.6 percentage points off 2013 GDP growth, effectively cancelling out the benefits of QE3. And that’s no coincidence. The Bush tax cuts are mainly about conservative long-term growth strategy (incentivizing the job creators) with a hefty dose of middle-class income boosting through tax credits and deductions thrown in to make the medicine more palatable. The payroll tax holiday, by contrast, was actually designed to be an economic stimulus measure.

Annie Lowrey of the NYT reported back in September that politicians had lost interest in extending it.

In a recent note, Nomura’s Ellen Zenter wrote:

Both parties in Congress have quietly agreed to let the payroll tax holiday expire. For a family of four making the median household income, that tax cut is worth about $40 a paycheck if you get paid bi-weekly. As noted in the November sentiment survey, “consumers do not make a distinction between federal income and payroll taxes, so any settlement that excludes an extension of the payroll tax cut could reduce optimism starting in early January.” We contend that households may curb spending in anticipation of lower take-home pay before January, cutting into late-holiday spending.

In Goldman’s assumption about the eventual “deal”, the Payroll Tax Cut is expected to completely expire as the law currently stands.

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Photo: Goldman Sachs

It’s possible that the issue is getting some play, however.

Conservative columnist Ross Douthat at the NYT argues today that not only should Republicans embrace the holiday, they should then advocate a full repeal in favour of a Social Security system paid for out of general revenues. It seems incredibly unlikely that anyone would sign this wholesale change to Social Security’s funding, though at least people are talking about the upcoming expiry.

Says Douthat:

It’s been left to a few prominent Democrats, including Representative Chris Van Hollen of Maryland, to make the case for letting the holiday continue. This is a positive sign for liberalism, since it suggests a preference for middle-class paychecks over middle-class entitlements, and a willingness to recognise that the ideals of work and thrift and upward mobility aren’t necessarily well served by the way we tax and spend today.

It will be a discouraging sign for conservatism if these Democrats don’t find Republican allies. Nothing cost the Republican Party more dearly in the last election than the sense that the party didn’t care about the struggles of the middle class. The payroll tax cut is addressed directly to those struggles — and it’s also a case where the short-term interests of Americans living paycheck to paycheck align with the long-term conservative interest in entitlement reform.

Bottom line: This is a huge component of the Fiscal Cliff that’s hardly gotten any attention. It’s getting some buzz now, but assuming that’s not enough to change the current trajectory of things, then that means US consumers will get dinged regardless of the deal on taxes.

SEE ALSO: Here’s how big the payroll tax cut holiday is compared to everything else >

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