The Payroll Tax Cut Deal Gets Worse

Posted: Dec 27, 2011 12:55 PM
The payroll tax cut deal that President Obama signed on Friday was a policy nightmare - an unworkable two-month temporary cut that will be nigh-impossible to administer and sets the entire fight up again for two months from now.

What's more, we're now finding out that the legislation also includes a temporary tax hike on upper income-earners.

Under the new law, an additional income tax will be imposed on those taxpayers who receive more than $18,350 in wages during that two month period. The tax is an amount equal to 2% of the amount of wages received during the two-month period in excess of $18,350 (and not greater than $110,100).

The Congressional Budget Office hasn't scored this legislation yet, but in the past, they've said that tax cuts on high-earners result in more economic growth and tax hikes slow economic growth. And as far as the long-term goes, the effects of adding to the national debt for tax cuts of this type will impede long-term growth, swamping out whatever positive short-term results. We also won't know, until we get a CBO score, approximately how much this "recapture" tax will be projected to raise in revenue.

Additionally, this completely flies in the face of even what progressive economists would advise. Keynesianism is predicated on deficit spending in a sluggish economy and tax cuts for all, not just some. Furthermore, the optics are puzzling; Democrats don't even get to score the cheap political points that they normally would with their base by proselytizing against "the rich"; this was something snuck into the bill that flew under the radar.

Regardless, the absolutely abysmal mishmash of "compromise" that went into the payroll tax cut deal has gotten worse with this "recapture" tax provision. Congressional Republicans were soundly beaten on this issue. It will be up to their constituents to put substantial pressure on so that when this issue comes around again (and it will!), they don't lie down so easily.