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The Payroll Tax Cut And The Lucky Duckies

The Democrats want to extend the one-third payroll tax cut. The Republicans don't want that to happen unless the revenue is made up somewhere else, and they oppose making it up with the millionaire surtax that the Democrats propose. On Fox News Sunday Chris Wallace asked Senate Minority Whip Jon Kyl, R-AZ, a pretty good question: How come Republicans say we have to pay for extending the payroll tax cut when they never said we had to pay for enacting the Bush tax cuts? Well, Kyl said, one difference is that "the payroll tax doesn't go into general revenue, it supports Social Security. And you can't keep extending the payroll tax holiday and have a secure Social Security." If he'd stopped right there his name probably wouldn't be in the headlines today.

But he didn't. He went on to contrast the beneficial effect of keeping taxes low on "the people who provide the jobs" with the wasteful effect of extending a tax cut to the endlessly replaceable drones who perform those jobs. He didn't call them "endlessly replaceable drones," of course, but that characterization matches the thrust of his argument. "The payroll tax holiday has not stimulated job creation," Kyl said. "We don't think that is a good way to do it."

Wallace then pointed out--and bully to him for doing so on Fox News, of all places--that economists say that failing to extend the payroll tax cut and jobless benefits (also part of the package) would lower Gross Domestic Product by 1 to 2 percent and cost 500,000 jobs. Wallace said that these economists contend "there's a real danger" that if the payroll tax cut and jobless benefits aren't extended "that you'll throw the country back into a recession." Kyl replied that "Art Laffer, who's a respected economist," doesn't think so. For details about how deeply "respected" Arthur Laffer and the supply-side theory he spawned are within the economics profession--even among conservative economists--I refer you to The Big Con, an excellent 2007 book by my predecessor in this space, Jonathan Chait. (Not to be confused with another excellent book of the same title by David Maurer, published in 1940, that inspired the movie The Sting.) Kyl then went on to say that the ultimate solution was to lower tax rates on the rich while eliminating tax deductions that favor the rich. Which makes me wonder: If Republicans think that economic recovery depends on throwing money indiscriminately at "job creators," why don't they favor throwing indiscriminate tax deductions their way? But I digress.

Kyl's deeper reasoning, if current right-wing orthodoxy is any guide, is that it isn't just that the rich must pay less in taxes. It's that the poor and the struggling lower middle class must pay more, lest they get conditioned into thinking of the federal government solely as a source of benefits. Since 1979 the federal income tax has gotten slightly more progressive, but it isn't because the rich have paid more; quite obviously, they've paid less. It's because under President Reagan and especially under Bill Clinton the federal government cut taxes aggressively for those at low incomes and provided a tax credit to the working poor. The Wall Street Journal editorial page has called this class of taxpayers "lucky duckies." The percentage of Americans who since the 2008 downturn have experienced a decline of 25 percent or more in "available household income," defined as household income minus medical expenses and debt servicing, now exceeds 20 percent, according to a new Rockefeller Foundation report by Jacob Hacker and four collaborators. (The wealthy are excluded from Hacker's calculations, on the grounds that they're sufficiently liquid to cover losses of this magnitude.) Serves those bratty duckies right! (The new report isn't yet online but should be soon.) 

While the federal income tax has become slightly more progressive, the payroll tax has become slightly less so (and it was pretty regressive to begin with). Moreover, the payroll tax now accounts for a greater proportion of total federal taxes paid than it did 32 years ago. From the Republican view, then, higher payroll taxes are an important check on the dangerous fiscal coddling of the proletariat. The GOP till now has hesitated to say "we think the payroll tax is swell because it nails working people so much more than the rich." John Kyl just moved the GOP a little bit closer in that direction.