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The GOP's Payroll Tax Trap

President Obama has been talking a big game on taxes recently.  As the clock ticks down on 2011, the country inches ever closer to a massive tax increase triggered by the automatic expiration of the Bush-era tax levels.  This would impact not just "the rich," but every income tax-paying American.  While the president has droned on about "fairness" since the 2008 campaign, he seems to have honed in on one favored approach in recent days: Badgering Republicans to prolong the temporary payroll tax "cut" window, which he says will spur growth and help create jobs.  This is the element of his so-called "jobs" plan on which he's planting his flag and investing an enormous amount of political capital.  Why?  Pure politics, of course.  He thinks he has Republicans over a barrel on this one, and you know what?  He just might.  To lay the groundwork for this discussion, watch the following smug media appearance from The One earlier in the week.  The contours of his anti-Republican attack aren't hard to spot:



The CliffsNotes version:

(1) Republicans vehemently oppose every tax hike on the rich, yet they're unwilling to prevent this tax hike on middle class families.

(2) Republicans never seem to care about "paying for" tax cuts when they propose them, but they're insisting on doing so this time.

(3) In the interest of keeping the tax burden on middle class families low and controlling the deficit, I'm magnanimously willing to agree to responsible "pay-fors" that won't damage the economy.

(4) We must pressure these awful Republicans into extending this tax cut -- and they'd be economy-destroying hypocrites if they refuse.

What he won't tell you is that the temporary payroll tax "cut" has neither measurably spurred job growth nor grown the economy since it was implemented.  The last year of sluggish growth and high unemployment demonstrates that fact, a point even some Democrats have conceded.  But as we'll see, the economic effectiveness of the payroll tax cut is almost irrelevant here.  He also employs the old liberal trope that letting people keep more of their own money constitutes government spending.  In some cases, like temporary tax credits and patches, that's less misleading than usual.  In other circumstances, like permanently lowering rates, the same Lefty framing discounts the dynamism and economic expansion such a change has on the economy.  Also, Obama's idea of "responsibly" paying for this temporary cut extension involves taxing "the rich."  That's right: We'll pay for a one-year tax cut extension on most people (a program that hasn't moved the needle on the economy) by levying at least ten years of "surcharge" taxes on the people who create jobs and invest.  In Obama's mind, this won't "hurt the economy."  What he says he's unwilling to do is pay for it with spending cuts.  Of course.


Oh, and by the way, payroll taxes are what fund Social Security -- which is already running annual deficits, and is on the path to total insolvency.  Under Obama's paradigm, we'd continue to sacrifice Social Security revenues by extending the temporary tax cut (perhaps acceptable) and "pay for" it by taxing small business owners (totally unacceptable).  A large majority of small businesses file their taxes as individuals.  Faced with an increased tax burden, it's likely that many of these businesses would either freeze hiring, or even shed jobs to compensate for the bite out of their bottom line.  That outcome, in turn, would result in more people out of work, and fewer people paying payroll taxes -- thus exacerbating our Social Security funding woes.

Now, for a moment, try to set aside Obama's dissembling and economic fallacies.  His political narrative is pure gold here.  He's hoisting the GOP on its own petard, daring Republicans to raise taxes on 160 million Americans in a terrible economy.  The class warfare attack ads write themselves.  "Republican X voted Y times to protect millionaires and billionaires from paying their 'fair share,' but when it came to protecting average taxpayers, Republican X said no."  Look, I fully understand the policy and economic reasons many Congressional conservatives oppose the payroll tax cut extension.  Politically, though, it's a nightmare.  The GOP would have a very steep PR hill to climb on this one, while Obama and Democrats sat around pinching themselves, wondering how they got this lucky.


Several Republican leaders recognize this.  Speaker Boehner, Leader McConnell, and the two leading GOP presidential candidates have voiced support for re-upping the payroll tax cuts.  They're being fought tooth-and-nail by rank-and-file conservatives.  Rep. John Campbell (R-CA) told me Boehner encountered an angry revolt from Congressional conservatives during a recent caucus meeting when he raised the prospect of ceding ground on this issue.  The GOP alternative isn't too bad: In addition to rejecting the millionaire 'surtax,' it would pay for the extension with a federal pay freeze and other spending reduction suggestions drawn from the president's own Simpson-Bowles debt commission.  Some Republican lawmakers still oppose the idea on principle.  That's all well and good, but if the American people internalize the Democrats' narrative on this one -- and the media will see to it that they do -- it's not going to be pretty. 

Republicans should negotiate the best deal they can, prevent tax hikes to pay for the tax cut extension, and move on.  This is not the hill to die on.  Plus, it would have the fringe benefit of denying Obama one of his most potent (read: only) arguments against Republicans heading into the election: That they're stubborn, uncompromising do-nothings.  In truth, they'd have reached a consensus with Democrats and approved multiple layers of Obama's jobs program:  Ratifying trade agreements, passing patent reform, repealing a withholding law, and extending the payroll tax break.  Showing flexibility on these issues would also make it easier to dig in an oppose the really bad stuff, like tax increases and additional "stimulus" spending.


Parting thoughts

(1) Don't think the media won't shamelessly parrot Obama's preferred framing of this controversy?  Read this infuriating blog post for a reminder that the MSM treats Republicans and Democrats differently.  Always and forever.

(2) Allahpundit makes a critical point about whose policies are really setting middle class families on a collision course with severe tax pain in the not-too-distant future:

[Consider] the surreal hypocrisy of O lecturing the right on taxes when in fact Obamanomics makes middle-class tax hikes a fait accompli sooner or later — although certainly no sooner than election day, natch. His party opposes spending cuts of every sort except, of course, to defense, and gutting the Pentagon won’t get us remotely close to even budget-wise. Neither will new taxes on the rich, even at dramatically higher rates. If you want a robust entitlement state, you’ve got two choices: Squeeze the middle class or keep borrowing and wait for the Greece scenario to unfold.

Yup.  The reckoning is coming, and Obamanomics is accelerating that crash.  Think we're alarmists?  Check out Jim Pethokoukis' charts on the financial states of our two biggest entitlement programs, and remember that we've just added another one on top of them.  Yikes.



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