For the past 18 months or so, payroll taxes have been unusually low thanks to a rare bit of bipartisan agreement. And that is 100 percent as it should be. The economy is depressed right now, and interest rates are super low. Those two factors point, as Keynesian liberals have been screaming for years, in the direction of high short-term budget deficits. But government spending is controversial, so politics intrude. Yet completely separate from that controversy, the fact is still that the federal government spends a fair amount of money, and we need to think about how to finance that spending.
With interest rates low and the economy depressed, the correct answer is: with borrowing.
The low interest rates mean that borrowing is an unusually low-cost financing option right now, and the depressed state of the economy means that taxes on people’s labor are an unusually costly option right now. Firms need every possible incentive to hire, workers need every possible incentive to accept jobs, and households need every possible dollar of purchasing power in their pockets. And the payroll tax—a broad-based tax that basically all working Americans pay—is an ideal tax to cut. Under the circumstances, the only problem with current payroll tax policy is that the tax is too high. As long as the economy stays depressed and rates stay low, why not cut it all the way down? That serves as a de facto helicopter drop of money on working Americans.
Yet tragically, Annie Lowrey reports that nobody in Congress much likes Congress’ best policy initiative, and the tax cuts are overwhelmingly likely to expire on Jan. 1. People like to talk about the deficit, and Republicans and Democrats alike are really only interested in arguing about the long-term fate of the Bush tax cuts.
But someone really needs to ring the alarm bells on this. There are a lot of bad ideas out there, but most of them accord with someone’s ideological principles or big-picture partisan agenda. The looming payroll tax hike, by contrast, is entirely pointless. Neither progressive ideology nor conservative ideology in any sense mandates that we implement a big regressive tax increase amid a period of sky-high unemployment. Doing so is only going to stall the household deleveraging process, make it harder for businesses to get customers, and immiserate stretched American families. We really need to stop this.