Washington, DC was thrown for a loop yesterday when House Speaker John Boehner (R-OH) announced that he and his caucus would reject a bipartisan payroll tax extension bill that had already passed the Senate with 89 votes. The deal, negotiated largely between Senate Minority Leader Mitch McConnell, Senate Democrats, and the White House would have extended payroll tax cuts that have been in place already for several years as well as forcing the Obama administration to accelerate its decision-making process on the Keystone XL pipeline. Boehner had, by most accounts, given McConnell his proxy to negotiate on behalf of all Senate Republicans, but after the deal was finalized House backbenchers started complaining and Boehner flip-flopped. It’s quite true, as the backbenchers were complaining, that Republicas didn’t get a ton of concessions in exchange for the tax extension. But then again, the idea that they would get a ton of concessions was always odd considering that most of them claim to favor the tax cuts on the merits. The extraordinary thing is that the debt ceiling standoff has made many Republicans believe that in any situations where the GOP favors X and the White House also favors X that they can refuse to agree to X until the White House agrees to Y and win concessions.
This leaves the future of tax policy unclear. The line emanating from the White House and from Senate Democrats is that the Senate has already done its job on this and gone out of secession. Now either payroll tax rates will go up, or else the House will agree to pass the bipartisan legislation that passed the Senate.
In economic terms, the payroll tax measure is interesting because it acts on both the AD and AS sides of the equasion. Employed people get more money in their pockets, which presumably leads to a higher level of consumption or a faster process of debt-deleveraging. But payroll taxes are also a way to manipulate unit labor costs (how many dollars does an employer need to spend per dollar’s worth of output) without trying to get people to accept lower wages. The logic of those two ways of looking at it isn’t identical in terms of the implication for policy design but it comes out pretty similarly (especially since the kind of people inclined to emphasize AS are also the kind of people inclined to say that ultimately workers pay both the worker-side and the employer-side of the payroll tax) and thus should be fruitful terrain for compromise on all fronts. House Republicas say they don’t like the “uncertainty” that would be involved in a two month extension, which I think everyone agrees isn’t optimal. But time is running short and it’s hard to see why gridlock and a zero month extension would create a more certain environment than kicking the can down the road while negotiations continue.