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Democrats to Push for Payroll Tax Cut Extension

We’re headed into a Bizarro world situation over the next few months, where Democrats will be demanding a tax cut, with Republicans lining up on the side of a tax increase.

But before I explain, let me question that first sentence. Is it such a Bizzaro world scenario? The stimulus package had 40% tax cuts. Democrats agreed to extend the Bush tax cuts. The President never tires of mentioning the 16 small business tax cuts that he has enacted while in office. The other day, Dan Pfeiffer had a blog post on the White House website that praised the fact that “The President has signed more than 40 tax cuts into law” and that “the Republicans have voted against 16 tax cuts for small businesses.” I don’t think the conventional wisdom is at all true on this point. There seems to be bipartisan support for a regime of tax cuts, whether as a stimulus measure or just as a basic belief. We can get into the heads of Democrats and ask whether they are merely trying to neutralize the tax and spend liberal label, or whether they have a sincere belief in tax cuts to create jobs, but when you’re talking about 40 tax cuts, I don’t know if it really cares.

In this case, we’re talking about the extension of the payroll tax cut, which plans to be a full-court press for the rest of the year.

The campaign will involve a wide range of party assets — from lawmakers to new media operatives — and take place in a number of states, including New Mexico, Colorado, Arizona, Iowa, Virginia, Pennsylvania, Florida, Nevada, New Hampshire, North Carolina, California, Minnesota, Wisconsin, South Carolina and Missouri.

According to a DNC official, members of Congress will be holding coordinated press conferences this week alongside allied groups and other elected officials. There will also be what the official described as a strong social media component involving Facebook campaigns and Twitter posts from members of Congress and the DNC — all toward the general effort of “hammering the hypocrisy of individual members who signed [Grover] Norquist’s pledge [not to raise taxes].”

The cut affects the 46 percent of all Americans who pay payroll taxes but do not qualify to pay federal income taxes. In the bipartisan deal last December to keep the Bush-era tax cuts in place for another two years, lawmakers signed off on a proposal to reduce the percentage of taxes that workers pay towards Social Security from 6.2 to 4.2 percent. That rate is set to go back up to previous levels on Jan. 1, unless Congress acts.

Is the payroll tax cut a good stimulus? It’s essentially a wage increase of 2% of take-home pay up to $106,000, with a smaller percentage increase (the same dollar amount) on salaries beyond that. It puts money into people’s pockets, most of whom have a propensity to spend. I think the Making Work Pay tax cut from 2009-2010 was designed better from that standpoint. That gave a flat $400 to an individual in the form of lowered withholding. The payroll tax cut is larger, but doubling Making Work Pay would have taken care of that. Instead, you have the working poor making under $20,000 a year getting less from the payroll tax cut, and everyone making over that getting more, especially at the top, where everyone from $106,000 and up gets nearly $2,000 annually. A lot of that money is just being saved.

There’s also the concern that continuing to cut the payroll tax will eventually open up a political argument about Social Security’s finances. In theory, Social Security is held harmless by the cut, with general revenue replenishing the difference. But this could be construed by some to say that Social Security is becoming a greater burden on taxpayers and must be cut as a result. So far, that argument hasn’t really been made, and the trust fund has been replenished. But after another year, who knows? Will we ever be able to restore the payroll tax at the 6.2% level?

However, it is interesting to see Republicans move into a position, explicitly, of taxing the poor. The bogus talking point that nearly half of all Americans don’t pay taxes neglects sales taxes, gas taxes and yes, this payroll tax that the GOP wants to hike up. And many of those “lucky duckies” who don’t pay federal income taxes are people on Social Security. If ever there was a case to be made about double taxation, it would be on taxing all Social Security benefits, which came out of people’s paychecks their entire working lives.

But this plays into the typical conservative worldview of the lucky, undeserving poor people, sucking at the government teat and stealing the hardworking dollars of the real Americans. That’s it’s completely fatuous is of no consequence.

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David Dayen

David Dayen