Up Front

Web Chat: Congress Set for Showdown over Payroll Tax Extensions

Gary Burtless

Less than a week after the collapse of the super committee, Congress is set to begin debate on extending and expanding payroll tax cuts due to expire at the end of the year. On December 1, Gary Burtless took your questions on the payroll tax legislation recently introduced in Congress during a live web chat moderated by POLITICO.

12:29 Vivyan Tran: Welcome to the chat everyone, let’s get started.

12:29 Comment From Anne: Can you explain to us the payroll tax extensions being proposed in the Senate? Who would be eligible?

12:30 Gary Burtless: The payroll tax cut proposed either by the president or Republican senators would apply to anyone who pays the Social Security payroll tax—in other words, all wage earners covered by Social Security and all the self-employed.

12:31 Comment From Tony: Why are Republicans now opposing this bill? It seems like they are always championing lower taxes.

12:34 Gary Burtless: One reason is that they say they oppose measures that increase the deficit. Even their variant of the president’s payroll tax cut plan would not increase the debt in the long run, because they propose to pay for the tax cut by freezing federal government employee pay by an additional three years and by reducing the number of federal government employees by 10%. I am fairly sure, however, that Republican legislators do not oppose raising the deficit … so long as the deficit increase is caused by a tax cut that they favor. They simply are lukewarm to the idea of giving nearly all wage earners and all the self-employed a simple payroll tax cut.

12:34 Comment From Joe: How much would the average worker or family benefit from the extension?

12:36 Gary Burtless: If the payroll tax cut is not extended beyond December 31, 2011, wage earners and the self-employed who earn $50,000 a year will see their payroll tax withholdings increase $1,000 next year. That’s about a $20 per week drop in their families’ budgets.

12:37 Comment From Bob from CA: What ultimately happens if Congress is unable to reach an agreement and pass this legislation?

12:41 Gary Burtless: The Congress faces at least two major decisions by the end of the year: Should we let the 2% payroll tax cut expire at the end of December? And, should we let the unemployment insurance extensions expire? I have not come up with independent estimates of the consequences, but I think standard economic estimates suggest that if we let both measures expire it would reduce employment (or employment growth) next year by about 725,000. That might translate into an increase of about one-half percentage points compared with the unemployment rate we would have if the measures are extended. This estimate is derived by calculating all of the drop in consumption that taxpayers and unemployment benefit recipients would see if their payroll taxes are raised or their unemployment benefits came to an end.

12:41 Comment From Francis: Should the country really be extending tax cuts at a time when our government is so heavily in debt?

12:44 Gary Burtless: That is the question that deeply divides both Congress and outside experts on the economy. My view is that we should be turning your question on its head: Does it really make sense to be increasing taxes on wage earners and the self-employed when the nation is suffering 9% unemployment? When there is an enormous amount of unused productive capacity in the nation’s factories, shopping malls and office parks? When the federal government can borrow funds from savers at historically low interest rates? I think the answer to those questions is “No, it doesn’t make sense to be raising taxes right now.”

12:45 Comment From Sam: What is the likelihood that the payroll tax cuts will be extended?

12:48 Gary Burtless: I am a lowly economist, not a well-informed political pundit. My guess is that Congress will probably pass something, though I’m not positive it will be a simple extension of the 2% payroll tax cut. One reason for thinking this is that both the administration and Republican members of Congress have proposed a continuation of the payroll tax cut. They differ on the exact terms of the cut and the other items that would be included in the legislation. But my guess is that both parties will find it in their interest to make an accommodation that lets the tax cut continue … in some form.

12:48 Comment From Molly: Is the main sticking point between the two parties about how to pay for the payroll tax legislation?

12:50 Gary Burtless: Yes. President Obama’s plan involved increasing the size of the payroll tax cut and financing part of it with a 3.25% surtax on the incomes of people with more than $1 million a year in income. The Republicans strongly oppose that financing method. The Republicans’ plan is to freeze federal government salaries for a total of 5 years and reduce federal government payrolls by 10%. Perhaps the two parties will compromise by setting aside any method for “paying” for the tax cut.

12:51 Comment From Tina: The Republicans claim that the tax on millionaires will hurt small business owners and make them reluctant to expand and thus create jobs. How valid is this argument?

12:54 Gary Burtless: How many Americans with income from a small business earn $1 million or more in taxable income per year? I suspect that the correct answer is “Not very many.” But we would have to check with experts to be sure. One thing to bear in mind: The tax revenues of the federal government are near a three- or four-decade low as a percentage of the size of the economy. It’s hard to argue that high taxes are currently a barrier to business expansion or small-company growth.

12:54 Comment From Vi: Why are we constantly debating these types of exemptions here in the U.S.? Why can’t we just reform and simplify the tax code once and be done?

12:57 Gary Burtless: The main reason is that many of the people and businesses who spend the most time and money influencing lawmakers will ramp up their efforts to oppose any simplification that increases their taxes. Yes, the tax system is very complicated and could be made simpler for most of us. But many simplifications would remove tax preferences that businesses and influential people have spent many years trying to put in the tax code.

12:57 Comment From Karen K: Does the Republican proposal stand a chance of passing in Congress?

12:57 Gary Burtless: No.

12:58 Comment From Tom: What about the extension of unemployment benefits? That seems like a good idea both on humanitarian grounds and because it will help the economy. Do you agree and do you think Congress will act?

1:02 Gary Burtless: I agree with you, and I agree with both of the reasons you mention for extending the unemployment insurance measures. I think the Congress will probably act. It may be no coincidence that the present unemployment insurance extensions are slated to end around a national holiday. I can already imagine hundreds of newspaper reporters and cable news commentators beginning their stories with the line “In a nasty Christmas present for the nation’s unemployed, Congress has allowed unemployment benefits to lapse for 1.8 million Americans …”

1:02 Vivyan Tran: Thanks for the questions everyone, see you next week.