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Paying for the Payroll Tax Holiday

It’s an old saying in journalism that “If your mother says she loves you, check it out.” But it seems if a journalist’s mother says that two plus two is five, he takes it on faith.

What is it with journalists that they can’t or won’t deal with numbers? Politicians can spout the most tendentious statistics that compare apples to oranges, choose convenient base lines, even use charts whose shapes are deliberately chosen to give a false impression, and reporters all too often just report them. CBO estimates based on obviously nonsensical assumptions (assumptions that the CBO is congressionally mandated to assume) are treated as gospel.

Considerable majorities of both parties in Congress want to extend the payroll tax holiday that expires at the end of the year. Failure to do so would result in as much as $1,500 a year in reduced take-home pay for an average family. Republicans want to pay for this by freezing the salaries of federal workers, who already earn considerably more than their private-sector counterparts, for three years and reduce the federal payroll by ten percent through attrition. Democrats want to pay for it (are you sitting down?) by raising taxes on the rich.

But I have only seen one news report (h/t Powerline) that does the math to see how close the Democratic proposal (a 3.25 percent surcharge on adjusted gross incomes over $1 million) comes to paying for the payroll tax holiday. The answer is, it won’t pay for even a tenth of it.

The payroll tax holiday is estimated to cost $265 billion, but the tax surcharge would yield only $21.4 billion next year, assuming no tax avoidance measures on the part of the taxpayers are implemented, which they certainly would be. So the surcharge would have to be in place for well over a decade to pay for an extension of the payroll tax reduction for one year.

The current two-year pay freeze for federal employees is estimated to save $60 billion over the next ten years. A three-year extension would save far more, but by no means enough to pay for it on a pay-as-you-go basis. The savings would come mostly in future years as the frozen baseline reduces the cost of compounding later pay increases. The federal civilian payroll in 2010 was $152 billion, so a ten percent cut in employees, even if implemented immediately rather than by attrition, would save only $15.2 billion this year.

So both sides want to pay for the current cost of the payroll tax reduction today in the usual Washington pie-in-the-sky manner–by increasing taxes or reducing federal expenses elsewhere tomorrow. One can make at least a Keynesian argument that the increased federal deficit that would result from extending the payroll tax holiday is good policy in a still very sluggish recovery. But to say it will be “paid for” is ludicrous.

 


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