As U.S. deficits and thus the federal government's debt had been increasing since the Clinton Administration in the late 1990s, proposals for a payroll tax-cut entailed risking the financial condition of the U.S. Government. To be sure, increasing government spending above inflation was risky too. Here, though, tax policy as it relates to deficits, and thus debt, is analyzed.
During the summer of 2011, Rep. Eric Cantor (R-Va), the U.S. House's Majority Leader, opposed continuing a tax cut. It was not the tax cut that had been enacted under George W. Bush that disproportionately benefitted the top brackets. That tax cut was sold to the American public as good under the supposition that the growth of jobs would result. The tax cut opposed by the Majority Leader in 2011 pertained to the payroll tax. Workers’ contributions to social security were to be cut from 6.2% to 4.2% until the end of 2011. A spokesman for the Majority Leader argued that if “the goal is job creation, Leader Cantor has long believed that there are better ways to grow the economy and create jobs than temporary payroll tax relief.”[1] However, it could be argued that whereas the tax cuts at the upper-income brackets tend to be saved because the wealthy already have the means to purchase what they want, workers tend to spend any extra disposable income precisely because they don’t have the means to buy even all that they need, particularly in the case of families. Moreover, workers would feel the end of a tax cut more than a rich person would.
It does appear that the Republican party’s support of tax cuts hinged on the financial interest of the rich—tax cuts are not created equal. This asymmetry eclipses the party’s ideological goal of smaller government, for otherwise any tax cut would be sought because it would mean less government taking as well as the possibility of starving government spending. Furthermore, the asymmetry trumped a priority on reducing a deficit that had been over $1 trillion in 2010. A deficit is the annual addition to the U.S. Government’s debt, which was around $14 trillion at the start of 2011. On the heels of S&P downgrading that debt to AA, continuing any tax-cut, even to prop up the economy, can be reckoned as foolhardy unless the money that taxpayers would otherwise pay in taxes is spent or invested sufficiently to boost the economy enough that the government would take in more tax revenue than the amount lost due to the tax-cut.
It is possible that Freddie Mac and Fannie Mae could have done more for the economy by allowing homeowners in trouble to refinance to the lower interest rates in 2010 and 2011 than would have been lost from ending the tax cuts. If so, it could be that we could do better in lowering deficits while stimulating the economy. Even with some drag on the economy, the numbers on the baby boomers retiring suggests that the social security fund could not afford the payroll tax cut in 2012. In fact, it could be that the fiscal impacts of government policy are less significant on the overall economy than on the deficits and debt, which are more immediate to the government's financial position. Debating whether to continue tax cuts with respect to economic growth (and even jobs) may reveal a lack of attention on reducing public debt as a priority if the tax revenue given up by the Internal Revenue Service is more than additional tax revenue to be obtained from the added economic growth from the tax-cuts. Indeed, analysis of the Bush tax cuts had shown that the tax revenue given up was more than the induced take. In technical language, the Laffer Curve had already been discredited by 2011. Therefore, ignoring the cost of a tax cut in terms of tax revenue, and thus higher deficits, is negligent and irresponsible, whether by Congress, the media, or the citizenry itself.
1. Jennifer Steinhauer, “For Some in G.O.P., a Tax Cut Not Worth Embracing,” The New York Times, August 26, 2011.
