The Illogic of "Funding" Payroll Tax Cuts

Last I checked, the whole point of a reduced payroll tax was to stimulate growth by keeping more money in the economy as opposed to channeling it into the coffers of the U.S. Treasury.

Given that, it makes no sense that Republicans in Congress are obsessed with "paying" for  the payroll tax extension by cutting government spending -- which would take money out of the economy and partly cancel out the stimulative effects of a payroll tax cut. According to the New York Times, House Republican are proposing at least $70 million in spending cuts to help fund the payroll tax cut (and an extension unemployment benefits), including a:

one-year pay freeze for federal workers, a measure to raise Medicare premiums on some people and a proposal that would allow the government to claw back some subsidies for the purchase of health insurance under the new health care law.

The pay freeze part of this proposal is especially inane. What's the point, stimulus-wise, of making paychecks for one group of Americans larger by stopping the paychecks of another group from growing? With the economy showing signs of life, Congress should be focused exclusively on stimulus and circle back to deficit reduction later on.

Democrats aren't helping matters with their own proposals to fund the payroll tax cut by raising taxes on the wealthy. To be sure, you do get a net stimulus by raising taxes on rich people and using the money to cut taxes on lower-income people, since tax hikes for the rich don't much affect their spending while tax cuts for ordinary earners are often spent immediately. So, in theory this trade-off makes sense -- a lot more sense that what Republicans are proposing. 

The problem, though, is that Democrats are legitimizing the idea that payroll tax cuts need to be offset at all and that deficit reduction matters right now. While tax hikes on the wealthy are the right thing at some point, this is not the time or place to be pushing this idea. Any political points that Democrats score by banging the populist drum aren't worth the credence they are lending to a misguided deficit obsession.

Both sides are playing politics here and for all the usual reasons: Republicans are playing to their anti-government base, Democrats are standing up for the little guy against the rich, and both sides are showing they care about the deficit, an important issue for swing voters.

I assume that this posturing will only last for so long before lawmakers do what everyone expects them to do -- which is to extend both the payroll tax cut and unemployment benefits with only superficial offsets. That's the right thing to do. Still, in today's Washington you never know what's going to happen during these tense standoffs and, in this case, millions of Americans could find themselves with smaller paychecks and no unemployment benefits come March.