Keep the Payroll Tax Holiday Until Unemployment Falls

Extending the partial payroll tax holiday was not part of President Obama's most recent fiscal cliff offer, delivered this week, and that needs to change. Sure it was supposed to be temporary, but given the cut's sucess and the economy's still fragile state, an extension would be beneficial to small business owners and millions of middle class families whose taxes have gone down as a result.

Since the payroll tax holiday was instated two years ago, workers have been paying a rate of 4.2%. Without an extension, in 2013, the rate is set to rise back to 6.2% on the first $113,700 in wages. 

The original point of the payroll tax holiday was to stimulate consumer spending and aid middle-income households. For the most part, it has done just that. As the New York Times reported back in September, analysts believe the expiration of the tax cut could shave as much as a percentage point off economic output in 2013, and cost the economy as many as one million jobs. The Tax Policy Center maintains that these cuts contribute to economic growth because households that receive it tend to spend the money rather than save it. While the White House has indicated it might like to see a payroll tax cut extension as part of a fiscal cliff deal, it apparently has chosen to not take up this fight. 

Even the Heritage Foundation’s J. D. Foster thinks an extension would be a good idea: arguing that “Obama and Congress both need to hear this alarm clock, wake up, and get busy avoiding a payroll tax hike insult to the middle class’s injuries of stagnant wages and high unemployment.”

Still, Republicans have been obsessed with "paying" for the payroll tax extension by cutting government spending in other areas, including a pay freeze for federal employees and raising some Medicare premiums. Their argument has been that Congress needs the money as it struggles with vast deficits. These measures, however, would have canceled out the stimulative effects of the payroll tax holiday. 

Meanwhile, some liberal Democrats don't like the payroll tax holiday because it drains resources from the Social Security trust fund and worsens the long-term financial challenges facing that program. 

But nothing could be worse for Social Security's health than continued long-term unemployment, which decreases payroll tax revenue for the obvious reason that future people are on payrolls. So we stand by the idea that Robert H. Frank has previously argued here:“This payroll tax holiday should remain in effect for as long as unemployment remains above 7 percent.”

That's a level that will not likely be reached until some time next year. Until then, the middle class needs the support.