Proponents of the tax cut deal point to the payroll tax holiday as a huge piece of new stimulus. In that, they are right -- it puts $120 billion in the hands of taxpayers, most of which they will spend. Moreover, it's not a giveaway to the wealthiest Americans -- the payroll tax cut only applies to the first $106,000 of income.
So at first glance, the payroll tax holiday seems like a serious, if inefficient, effort at stimulus -- one that is worthy of praise. Yes, $120 billion is a big sum, but that's the point -- stimulus needs to be significant to have an impact. And because it is a temporary one year tax cut, the general fund can cover the expense of the tax cut by depositing a $120 billion IOU to the Social Security Trust Fund, meaning Social Security benefits won't be affected.
But as I wrote yesterday, there's a problem: the payroll tax holiday won't be temporary. Sure, it's supposed to be for just one year, but if you think Republicans are going to miss an opportunity to demand permanent extension of a tax cut -- especially one that covers the cost of Social Security -- then you haven't been living in the same country as the rest of us. In fact, I can already hear Republicans saying that it must be extended, because now is not the time to raise taxes on the American public. And I can hear them now, laughing privately about the fiscal crisis that such an extension will cause for Social Security.
Sure, Democrats could fight the Republicans on extending the payroll tax holiday, but if you really believe Democrats will do that, then I've got an expiration of Bush tax cuts for the wealthy to sell you.
If we've learned nothing else from the tax cut deal, it's that there's no such thing as a "temporary" tax cut -- once a tax is cut, it stays cut. The only exception appears to be for those at the bottom of the income scale -- under this deal, taxes will go up on many families earning less than $40,000.
The reality is that politicians rarely find the courage to raise taxes, and there's no reason to believe that will suddenly change when it comes to the payroll tax holiday. Once the payroll tax is cut, it won't be going back up -- and that's a prospect Republicans dream about, because they will have finally created the fiscal crisis for Social Security that they've been so eager to "solve."