It's bad for growth and for the working class, and it makes entitlement reform harder.
We have two political parties in America, runs a saying that conservatives like to quote. One is stupid, the other is evil. And when they join forces to do something that's both stupid and evil -- well, that's what we call "bipartisanship."
The payroll tax holiday that passed Congress in the winter of 2010 was a rare exception to this pessimistic rule. Cutting the payroll tax was good short-term politics for both Democrats and Republicans: It was a tax cut that liberals hoped would double as stimulus, and a boost to the middle class that conservatives could support without embracing new federal spending.
But more important, it opened the door to what would be good long-term policy as well -- because more than almost any feature of the U.S. tax code, the payroll tax deserves to be pared away into extinction.
But now Washington is in danger of practicing payroll-tax bipartisanship of a more destructive sort. While the White House and congressional Republicans wrestle over where to set income tax rates and how and whether to cut spending, the payroll tax holiday has been orphaned. Lacking noisy champions and press attention, it's in danger of expiring at the end of the year out of political indifference.
That would be unfortunate. Payroll taxes are a relic of New Deal Machiavellianism: By taking a bite of every worker's paycheck and promising postretirement returns, Franklin Roosevelt effectively disguised Social Security as a retirement system, even though the program actually redistributes from rich to poor and young to old. That disguise has helped keep Social Security sacrosanct -- hailed by Democrats because it protects the poor and backed by Republicans as a reward for steady work.
But the costs of this disguise have grown too great to bear. Whatever its past political advantages, the payroll tax now imposes an unnecessary burden on a stagnating economy. In an era of mass unemployment, mediocre wage growth and weak mobility from the bottom of the income ladder, it makes no sense to finance our retirement system with a tax that falls directly on wages and hiring and imposes particular burdens on small business and the working class.
What's more, the payroll tax as it exists today can't cover the program's projected liabilities anyway, and the pay-as-you-go myth stands in the way of the changes required to keep Social Security solvent. All of the components of a sensible Social Security reform -- means-testing for wealthier beneficiaries, changing the way benefits adjust for inflation, a slow increase in the retirement age -- become easier if the program is treated as normal safety-net spending rather than an untouchable entitlement with a dedicated funding stream.
By cutting the tax rate and promising to make up the difference out of general revenue, the payroll tax holiday took a big step in this direction -- and letting it expire would take a big step back. Republicans have every reason to recognize this reality: Their long-term size-of-government goals require Social Security reform, and the illusions fostered by the payroll tax are an obstacle -- originally created by their political enemies! -- to any restraint in what the program spends.
Instead, a mix of ideology and cynicism has tilted Republicans against the payroll tax cut. The party's ideologues regard the issue as a distraction from the more important debate over income taxes, and some of them fret, a la Mitt Romney with the "47 percent," about taking too many Americans off the tax rolls. The party's cynics, meanwhile, have seized on the opportunity to imitate liberal scare campaigns on Social Security, and posture as staunch defenders of the retirement status quo.
It's been left to a few prominent Democrats, including Rep. 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 recognize 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.
That combination doesn't often come around. So there is only one question conservatives should be asking about the payroll tax holiday: How do we make it permanent?
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Ross Douthat's column is distributed by the New York Times News Service.
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