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Pelosi Confirms that Payroll Tax Cut Will Expire at End of the Year

On her way out the door at the end of Congress’ last session before the elections, House Minority Leader Nancy Pelosi sealed the fate of the payroll tax cut, if it wasn’t sealed already, ensuring that fiscal policy will snap back in 2013 by at least $125 billion.

“I would hope that we would not extend it,” Pelosi said of the tax cut, during a Friday sit-down with reporters.

The whole point of extending the payroll tax cut was to only do it for a year or two to ensure economic stability, she said. Now that things have stabilized, she continued, it’s time to get moving on bigger changes.

“Let’s deal with the budget issues. Let’s put the tax code on the table, simplify, make more fair and close a lot of the special interest loopholes that are in there,” Pelosi said. “I would not be among those advocating” to extend the cut, she said.

Many progressives agree with rolling back the payroll tax cut on the grounds that it threatens the Social Security Trust Fund by taking money out of it. Even though that money gets replaced with General Fund revenue, it adds to the burden of the trust fund, and makes it easier for politicians with designs on cutting Social Security to make the case that it has a budgetary impact.

Fortunately, almost no politician has actually made that case. David Axelrod said today that now was “not the time” to discuss Social Security reform, adding that Social Security “a much less imminent problem than Medicare,” which happens to be true from an actuarial standpoint. While obviously Social Security must be protected (actually expanded, to tell the truth), I think there’s a risk of going to the mats to safeguard it while ignoring all the other holes fiscal scolds and grand bargaineers want to poke in the social safety net.

But to wind this back around, allowing the payroll tax cut to expire does take $125 billion out of the economy in 2013. That money was decently targeted – though it could have been better – as an effective 2% wage increase for everyone making up to $110,000, with money also going above that cap but in smaller percentages. Taking that money away means a wage cut for all wage earners. And we know that wages are basically stagnant, so it’s not like that will get made up for by raises. That means that people will find themselves with less disposable income, making it harder to sustain consumer spending levels.

That’s just the reality of pulling that back. It may be the right time to do so, but maybe not. Unemployment will sit around 8% when the payroll tax cut goes away. The economy will be growing at a below-trend rate. The Federal Reserve has gotten into the game with more monetary easing, but global tail risks remain, including the potential end of growth from high energy prices. If we remain stuck in a relatively stagnant level, that means that this high 8% unemployment will never dissipate.

There are ways to design something that accomplishes the same goals as the payroll tax cut without the same threats to the Social Security system. In fact, that was the role of the Making Work Pay tax cut for working families, a 2008 Obama campaign promise. He wanted to permanently refund that money to workers – it ended up being $400 for the average individual and $800 for the average family – not to only offer that in the case of a recession.

Wide-ranging tax reform may or may not produce an efficient tax code that gives people with a higher propensity to spend more money, and allows the economy to take off in some fashion. But that’s a long-term goal, and frankly a moon shot. The here and now suggests that we still have an economy that needs stimulus. And while the fiscal cliff resolution isn’t known, we do know right now that the government will be taking $125 billion away.

Everyone assumes some snap back to growth in the next few years, but 2013 isn’t going to look very good.

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David Dayen

David Dayen

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