Diamond in the Rush

Since the new administration took office, Republicans have been seemingly bereft of ideas for fixing the economy. House Speaker Nancy Pelosi may not have been as nurturing of bipartisanship as some would have wanted in finalizing the stimulus bill in the House, but the final product included enough tax breaks to warrant support from a significant portion of the Republican caucus. That only three Republicans between the House and Senate voted in favor of the bill only made them seem like obstructionists in the eyes of the American people.

And the futile House vote orchestrated by Minority Leader John Boehner to institute a spending freeze was one of the least constructive routes the Republicans could have chosen, exasperating even a ranking, albeit independent-minded member of the conservative commentariat. This episode only illustrated how, lacking leadership and a clear direction, the Grand Old Party remains wedded to “principles” with no practical application to the crisis we’re in, a parade of political stunts accompanied by the hyperpartisan pronouncements of Rush Limbaugh and that curious crew holding forth on Fox News.

But wait. Hold the presses. One of those political stunts might actually have merit. “Merit” as in public policy merit, but merit also because it presents a political opportunity for Obama. There’s an idea being circulated by Senate Minority Leader Mitch McConnell, former House Speaker Newt Gingrich, and George W. Bush speechwriter David Frum, and even gracing the airwaves of “El Rushbo,” that could be the first truly bipartisan achievement of the Obama era: a payroll-tax holiday. Some proponents suggest a year or two (more like a payroll-tax sabbatical), but, at a cost of $100 billion per month, we’re probably talking more in the nature of one of those European holidays—i.e., a month or two.

Payroll taxes are the roughly 15 percent that gets taken out of each paycheck to cover the costs of entitlement programs such as Social Security, Medicare, and, depending on the state, unemployment and disability insurance. The employee pays roughly half of that 15 percent, and employers cover the rest. The payroll tax is regressive in that there is a ceiling on how much of your income gets taxed. In 2009, payroll taxes will only be levied on the first $106,800 earned, meaning that a millionaire will pay a far smaller percentage of income in payroll taxes than someone who earns $40,000. As it concerns Social Security, this is premised on the notion that you’re paying into your own personal account, not funding the benefits of those less or more fortunate than yourself.

The deeply regressive nature of payroll-taxes has prompted one commentator on the left to propose something far more dramatic than even a payroll-tax sabbatical. Hendrik Hertzberg in The New Yorker has suggested scratching the payroll tax altogether and instead levying a tax on carbon to fund Social Security and Medicare. We would be eliminating a tax on something we wish to encourage, job creation, thereby giving the fruits of their labor to lower- and middle-class workers, while taxing pollution, which we want to discourage. (It should be noted that such a proposal has zero prospects for being considered in the short term, as it completely upends the fundamental premises of the current entitlement system, but perhaps as we get further down the line with entitlement spending and more comfortable with the idea of a means-tested system, it might get a more serious look.)

Paul Krugman, the devil’s advocate on the left, tells us that we need more stimulus. Now is exactly the time when we should want to suspend regressive taxes and put money back in the hands of low- and middle-income families to spur household consumption. While economists can argue about the relative effectiveness of government spending as opposed to tax cuts in stimulating the economy (Krugman would presumably find a reason not to like this idea), who can deny that there would be a positive jolt to consumer spending from something as dramatic as a complete suspension of payroll taxes, even for a relatively short period of time? The February stimulus bill contains something along these lines, the Making Work Pay tax credit, which will mail out a refundable tax credit of up to $400 in both 2009 and 2010. But an actual hiatus on payroll taxes would mean bigger paychecks in the much shorter term.

And the politics would work pretty well, also. Because it solely benefits workers making $106,800 or less, it should be a no-brainer for congressional Democrats. Yet Obama could very conspicuously present it as a Republican idea. Would the Republicans run from it on the pretext that we are now too covered in red ink for it to be “fiscally responsible”? Or will they pose for those smiling photographs with Obama that will do little for their own political standing and make Obama seem even more above the partisan fray? Either way, Obama will emerge in a politically stronger position.


Clay A. Dumas ’10, a former Crimson associate editorial editor, is a social studies concentrator in Lowell House. His column appears on alternate Thursdays.