Congress is currently debating whether to extend the reductions in the FICA tax (payroll tax).  Democrats would love to extend it along with unemployment insurance, paid for with a new surtax on millionaires.  Republicans would extend it but would balance it with spending cuts.  Fortunately neither passed in the Senate today.  An extended payroll tax holiday will have no real impact on economic growth and will only further damage the financial solvency of Social Security and Medicare.

Usually Republicans love tax cuts.  It is strange to hear Republicans supporting an increase, especially one that affects nearly all Americans.  The reason is revenue from the payroll tax goes directly to pay for Social Security and Medicare.  It is not used in the general fund for defense, transportation, or anything else.  The reason they support restoring the tax to its normal rate is because of how miserably unfunded both Social Security and Medicare are.  An extended cut in the tax will only accelerate their demise.  Hard-line conservatives like Sen. DeMint, Lee, and Paul oppose the extension.

Not only does an extension of the cut damage two troubled entitlement programs, it has had little or no beneficial economic effect.  Temporary tax cuts in general do not generate economic growth.  They do help struggling families and individuals but by and large there is no significant economic impact.

It was misguided for anyone to think temporary tax cuts would be a panacea for the current recession.  The meltdown of 2008 was about excessive debt and poor financial decisions.  It led to the U.S. losing nearly $8 trillion in net worth.  If American families are deep in debt and seeing their net worth decline rapidly, they won’t be inclined to spend more.  Americans used the checks from Uncle Sam to help pay down debt and get themselves back above water.  Many are still not there yet.

American families and businesses were woefully over-leveraged in 2007 and 2008.  This was largely a result of the housing bubble and ridiculously low interest rates.  Americans have been strongly encouraged to spend-spend-spend for over a decade now.  In 2008 and 2009 the shopping spree came to an abrupt end.  Rather than make the same mistake twice, Americans are paying down their debt and trying to save for the first time in years.

In these economic conditions, extending the payroll tax won’t do anything for the economy.  Although it will help some Americans pay off some debt, this doesn’t stimulate growth.  It simply pays of homeowner and consumer debt by increasing the massive public debt.  It is no different than paying off one credit card with another.  In the end, the individual’s financial situation is no better.

Republicans should resist the instinctive desire to extend tax cuts and call for the end of the payroll tax holiday.  It is not helping the economy and the entitlement programs it funds are in dire need of revenue.  President Obama and Democrats will attempt to demagogue the issue, but bad policy is bad policy.  Americans will not vote for Democrats because they supported the payroll tax holiday.  It is one of many issues and nowhere near the most important one.  If Republicans want to cut taxes they should look to the income, capital gains, dividend, and estate taxes.  More importantly they should promote cutting taxes permanently, no more gimmicks.

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