- The Washington Times - Friday, January 18, 2002

With the Senate gridlocked over the economic stimulus package, year-end finger-pointing abounded for failing to achieve a compromise before the Christmas recess. Between the lines of predictable bouts of partisan rhetoric that resulted, a noteworthy admission has been implicit: massive tax breaks for corporations and the wealthy are not the most effective way to combat recession, create jobs, or achieve economic security.
That was hardly news to most of us, but what is surprising is the degree of bipartisan agreement on a bold measure that could effectively stimulate the economy: payroll tax relief. A proposal floated by Democrats but defeated in the first income tax cut package this spring, payroll tax relief was a sound idea that lingered on the Hill and eventually became a GOP proposal.
The day before the September 11 terrorist attacks, Trent Lott declared his openness to a payroll tax rebate. In the wake of the crisis, the White House surprised pundits by briefly flirting with a payroll tax rebate before veering off again towards repealing the alternative minimum tax. More recently, as the Senate deadlock intensified, economic wise heads as diverse as Sen. Jon Corzine, the former Goldman Sachs co-chair, and Lawrence Lindsey, President Bush's economic adviser, praised payroll tax relief as a better alternative.
Mr. Lindsey tested the waters by saying income tax credit for payroll tax was a good idea. A week later, the White House weighed in again with praise for a new GOP proposal for a one-month payroll tax holiday that would benefit employers and workers alike. Mr. Corzine and other Democrats have also championed the payroll tax holiday.
Both sides point out payroll tax relief, the only tax cut that would be directly targeted to job creation as well as consumer spending, could be a most effective stimulus. It would immediately impact the business cycle via withholding. Middle income workers whose spending drives the economy will feel the difference as soon as their next paycheck.
Employers, for whom payroll tax is a disincentive to staffing up, would find the cost of hiring decreased, stimulating job growth. This should please Republicans. The 80 percent of American workers who pay more in payroll taxes than in income taxes, including the 12 million families who earn too little to pay much or any income tax, but plenty of payroll tax, would finally catch a break. This should please Democrats.
With consumer confidence down and unemployment up, it seems a no-brainer to cut the one, bloated, regressive tax most responsible for depressing both. At its inception 50 years ago, payroll tax was 2 percent of federal revenue but grew steadily to a whopping 34 percent today. A third of Washington's revenue has come to depend on artificially inflating the cost of hiring, which puts the brakes on job growth.
Trying to rev the economy while heavily taxing payrolls is like driving with two lead feet, one on the gas, and one on the brake. Remove the drag of payroll taxes, even temporarily, and job creation accelerates, the tax base increases, revenues go up.
Payroll tax is by far the largest tax most Americans pay, and the most onerous. The lowest-paid workers devote the highest portion of their incomes to it, while the wealthiest Americans devote the lowest. Wages above $80,400 are exempt from the lion's share of the tax altogether. Meanwhile, it is the low- and middle-income workers whose disposable income drives spending. Increase their take-home pay, and spending goes up.
Senate Democratic Majority Leader Tom Daschle balked at huge tax breaks for businesses at a time when hundreds of thousands of workers are getting laid off. "It would be a tragedy if we left this session of Congress without helping the unemployed at all," he said.
Fair enough. A payroll tax holiday is no blank check to business, but specific relief to workers and employers alike. It would be a powerful, targeted stimulus for job creation, preventing more layoffs and providing more jobs for those already unemployed.
The White House wanted to emphasize tax cuts over spending. Mr. Bush said, "It is important for the Senate not to look for ways to spend new money, but to look for ways to create new jobs.'' Mr. Lindsey said, "What we have to do is target tax relief to the sectors of the economy that need it most … put more money in consumers' pockets and avoid this excessive spending binge."
Fair enough. Payroll tax relief is most effective precisely in the high-skill, high-wage sectors most critical to economic growth. It is one tax cut that actually cuts government spending, because studies show that as the cost of hiring goes down and employment goes up, social costs, dependency and government spending associated with joblessness everything from health care to welfare to law enforcement decreases.
Even before the stimulus package was declared dead for the 2001 legislative session, some in Congress rightly questioned whether the various proposals and counterproposals had become such a partisan exercise they were irrelevant to stimulating jobs and growth. But if Washington wants to recuperate the stymied stimulus debate, revive growth, cut taxes, create jobs and help the unemployed while avoiding excessive spending, payroll tax relief is available as that rare, third option that integrates the best of both parties' thinking.

Eugene Ludwig is a former comptroller of the currency, managing partner of the Promontory Financial Group and a member of the employment policy group Get America Working! (www.getamericaworking.org)

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