NCPA - National Center for Policy Analysis

How Not to Make Public Policy: The Payroll Tax Cut

February 22, 2012

In order to further stimulate economy, the Obama administration advocated a reduction in the payroll tax for the entirety of 2011, which was subsequently extended for the first two months of 2012.  However, the tax holiday is a public policy package that exhibits all of the worst possible traits of policymaking, says Charles Blahous, a research fellow with the Hoover Institution.

First and most importantly, the use of the payroll tax holiday as a means of recovery undermines the fiscal health of the federal government.

  • The holiday irreparably damages the financial strength of the Social Security Trust Fund, famously separate from the general revenues fund; the tax cut reduced Social Security tax income by $105 billion in 2011 alone.
  • Furthermore, because funds were diverted from the general revenues to cover the losses to Social Security, the tax cut further exacerbated total deficits, which have maintained unsustainable levels for four consecutive fiscal years.
  • By allowing a comingling of these two funds, the policy blurs the lines between them and undermines the autonomy of the Social Security program, causing it to resemble a public safety net more than a public retirement savings program.

In these ways, the policy has done a great deal of damage to the fiscal health of the federal government on the whole and Social Security in particular.  Additionally, the decision to lower the tax rate undermines several principles that have, until now, guided decision-making for the national government.

  • The volatile nature of the cut, which was intended only for 2011 only to be extended into 2012, confuses taxpayers and limits their ability to project their tax burden.
  • By allowing the aforementioned transfer of funds from general revenues to the Social Security Trust Fund, the policy limits transparency and ignores the time-honored autonomy of the two funds.
  • The policy also undercuts the quality of the public policy debate, as its supporters rely on economic theory that supposes a long-term cut, while the reality is that it is a short-term, unpredictable tax change.

Source: Charles Blahous, "How Not to Make Public Policy: The Payroll Tax Cut," Economic Policies for the 21st Century, February 15, 2012.

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