When President Obama signed the tax deal last December that extended the Bush tax cuts in exchange for a Social Security payroll tax holiday, he seemed confident it was in the best interest of the economy and the American people. “This is real money that's going to make a real difference in people's lives. That's how we're going to spark demand, spur hiring, and strengthen our economy in the new year,” he said. Six months later, economic growth is sputtering and job creation is up but unemployment remains at 9 percent.
If the tax holiday was designed as stimulus, why doesn't it seem to have helped? There are deep economic issues at play in the continued recession, but the holiday also had serious problems in its design. It was regressive, lowering all taxpayers' contributions (which are capped at $106,000) by 2 percent, meaning the government had to give CEOs thousands in tax breaks they didn't need. Someone earning $1 million saved $2,136 – a drop in the bucket to them but a lot of lost revenue for the IRS. Those at the top haven’t been reinvesting, so the amount they saved likely went into a bank account instead of back into the economy to restart growth.
Now that tax reform is again appearing on the horizon for lawmakers, Sen. Tom Udall is proposing the payroll tax holiday be abandoned in favor of its predecessor, the Making Work Pay tax credit. It offers a cut of 6.2 percent – a more significant amount than the payroll tax holiday. It doesn’t allow massive cuts to accrue at the top though; instead it imposes a salary-based cap of $75,000, which is $31,000 below the tax holiday cap so less of the benefits will accrue at the top. Seventy-five percent of households would see their after-tax income rise by an average of $385, and because they would be mostly low- and medium-income earners, they would probably spend it, stimulating growth.
Making Work Pay is fairer and makes more economic sense. It's not the comprehensive tax reform that pundits on all sides are calling for, but it's a good improvement from our current regressive revenue path.
