Larry Summers during a Wednesday afternoon gaggle with reporters:
Q So the only reason that the payroll tax holiday will provide more stimulus is because it’s twice as large. Making Work Pay was capped. Why didn’t you preserve Making Work Pay? Is it because, as the President said some months ago, it’s just a kind of invisible tax cut and didn’t provide any political benefit for the White House?
MR. SUMMERS: No, it came out of the process of compromise with the Republicans who were more attracted to the payroll tax holiday concept, and that was a proposal that, as had been coming out of here, we had been giving considerable thought to in the context of the President’s budget.
So now that we know that it was the GOP's preference for a payroll tax holiday over extending Making Work Pay, what are Republicans saying about the proposal? HuffPost's Ryan Grim reports:
"Once something like this goes into place, a year from now, when it expires, it'll be portrayed as a tax increase," said Sen. Bob Corker (R-Tenn.). So in a body like Congress, precedents matter and this is setting a precedent. I think that certainly is going to create some problems down the road if it passes."
Given that Congress, under Democratic control, can't gather itself to let tax cuts for the wealthiest Americans expire, members of both parties are convinced that letting the payroll tax rate revert back to its current spot will be near impossible.
"Once you bring a rate down, if it goes back up, people will feel that. They'll feel their paycheck being less and that argument" -- that letting it expire amounts to a tax hike -- "eventually is bound to be made," said Sen. Mike Johanns (R-Neb.).
"There's always a tendency to continue those things... Once something comes in, it's very difficult to change it," said Sen. George Voinovich (R-Ohio.) He then volunteered, without prompting, that "It would be detrimental to the Social Security system, especially when it's in bad shape."
HuffPost noted that some of his colleagues would likely treat the deprivation of Social Security funds as a benefit of such a circumstance rather than a drawback.
"I suspect so, yes," agreed Voinovich.
Note that none of the three senators quoted by Grimm explicitly endorsed making the payroll tax cut holiday permanent. However, each of them framed the expiration of the payroll tax holiday as a looming tax hike. And both Corker and Voinovich said such an extension would threaten Social Security's funding mechanism.
To Voinovich, the solution is to oppose any extension of tax cuts. But what about Republican Senators who vote for the tax cut deal knowing full well that one year from now expiration of the payroll tax holiday will be seen as a tax hike?
Lamar Alexander, the Senate's number-three Republican, also said that reform of Social Security should be tied to moving that tax rate back up. "My personal hope is that it doesn't become permanent unless we deal with a way to make Social Security solvent over the long term," he told HuffPost. "You have to remember, the payroll tax funds Social Security and I like the idea of a lower payroll tax contribution, but we've got to make sure Social Security is solvent, which we should be doing this next year as the first order of business." The way to make the program "solvent" and keep taxes low, of course, is to reduce benefits.
So Lamar Alexander says he only wants to permanently extend lower payroll taxes if we
"make Social Security solvent over the long-term" cut Social Security over the long-term. But, he also wants to make it clear that he likes the idea of lower payroll taxes, and he thinks the first order of business next year should be making Social Security solvent over the long-term cutting Social Security benefits over the long-term.
Republicans have wanted to cut Social Security ever since it came into existence, and with this payroll tax holiday, they will finally have a wedge to accomplish their goal, promising lower taxes now in exchange for reduced benefits later.
It's true that Republicans wouldn't hold all the cards in such a debate. Democrats could point out that you can also lower payroll tax rates without undermining the Social Security system's fiscal health by replacing the lost revenues with the elimination of the cap on payroll tax contributions. Lifting the cap would be a good idea and it would make the system more progressive. And if Democrats were to make continuing the payroll tax holiday contingent on lifting the cap, they'd have a powerful and effective argument.
But the problem is that it's a pipe dream to expect Democrats to make that argument without caving to the GOP's demands. All the proof you need of that is contained in the tax cut debate, where by President Obama's own admission, the GOP's strategy of hostage taking was effective. And that doesn't even take into account that next year, there will be a Republican House and smaller Democratic majority in the Senate.
So while the payroll tax holiday is a good piece of stimulus in and of itself, it all but guarantees that one year from now, we're going to see yet another tax cut hostage crisis. While it's easy to see that Democrats would be in a strong negotiating position and could end up on top, you could also have said the same thing about the current hostage crisis -- and yet the GOP position still prevailed despite enormous Democratic majorities in both the House and the Senate. Perhaps things will play out differently next time, but believing next time will be different requires a leap of faith -- because everything we're seeing now suggests the next hostage crisis will end as badly as this one.