The fiscal cliff compromise extended the 2001 and 2003 income tax cuts for everyone earning under $400,000 ($450,000 for couples), but it allowed the 2 percent payroll tax cut to expire. As David Brunori pointed out in Tax Notes this week, there wasn’t even much debate about the payroll tax cut. Both sides just assumed that it should be left out of any fiscal cliff deal. Democratic Rep. Chris Van Hollen of Maryland made some noise about including it, and Obama put it in his initial (and unrealistic) offer to House Republicans, but it was barely mentioned in the Senate and wasn’t really pushed by the White House after Obama began moving toward House Speaker John Boehner’s position.
The fate of the payroll tax cut is shocking. It was a relatively cheap way to deliver efficient economic stimulus. The cut lowered Social Security taxes from 6.2 percent to 4.2 percent. It cost the government about $120 billion a year, while delivering roughly $2,000 more to the average taxpayer over the course of the year (amounting to about $80 per paycheck). It was Obama’s most significant tax achievement, replacing the much smaller (and more complicated) Making Work Pay credit.
The payroll tax cut was initially a Republican idea, but the party quickly soured on it. In a preview of the fiscal cliff debacle, House Republicans initially refused to extend the tax cut, then retreated, voting right before Christmas 2011 to extend it for two months, then returning and allowing a long-term extension to pass with a mix of Republican and Democratic votes. The GOP claims that the tax weakens Social Security and costs too much. Of course, income tax cuts for people making over $250,000 a year cost quite a bit too, and the Republican Party didn’t seem to mind how that would weaken the government’s fiscal position. The payroll tax cut seems to be the only tax reduction that GOP lawmakers found fiscally irresponsible. Their opposition lends at least some credence to Obama’s frequent claim that Republican legislative positions are consistent only in that they aim to ensure the president accomplishes very little.
But Democrats weren’t very enthusiastic either. Part of the reason might be the AARP’s resistance to extension. That group, like Republicans, believed that the payroll tax cut might ultimately undermine Social Security, and Democrats were probably wary of a prolonged fight with a traditional ally. Their position, however, is at odds with their rhetoric. No portion of the fiscal cliff compromise is more targeted toward middle- and lower-income taxpayers than the payroll tax cut. And in the end, they simply let it die.
There was no reason for such unanimity over the payroll tax cut, and now working Americans will pay the price. Republican opposition to the payroll tax cut and support for lower income tax rates for upper-income taxpayers illustrates the party’s muddle over taxes. Democratic opposition undermines the party’s supposed commitment to keeping taxes down for the middle class. And Obama’s failure to push his own achievement only shows his own legislative ineffectiveness. Hopefully, voter ire over reduced paychecks will compound throughout the year and remind both parties in Washington just how foolish it is to raise taxes on such a broad portion of the taxpaying public.