What is the Endgame for the Payroll Tax Fight?

Well, it looks like the ship already sailed on extension of the payroll tax cut.  Republicans introduced their own legislation to continue the current payroll tax cut from 6.2% to 4.2% for another year.  This proposal, which would cost $119.6 billion in revenue for the remainder of FY 2012 and the first few months of FY 2013, does not include the Democrat provisions to cut the employer’s share of the payroll tax. 

Yesterday, I detailed some of my concerns from a public policy standpoint, but from a personal standpoint I’m not complaining.  Who knows if we will receive our Social Security money?  We as may as well keep the money now.  

So how will they pay for the deficits that will result from the $119 billion (additional) transfer from general revenues to Social Security?  Senator Dean Heller introduced the following plan:

•  Extend the current two-year freeze on federal employees’ salaries from 2013 through 2015 and expand it to apply to employees of the legislative branch, including members of Congress.

• Reduce the number of federal employees by 10% through attrition.  This would follow the framework of the Simpson-Bowles proposal to only allow the hiring of one new employee for every three who leave the federal workforce.

• Insert a line on every tax return for the Republican version of the “Buffet Rule,” in which rich liberals can volunteer to pay more taxes.

• Cut some benefits to those individuals with an adjusted gross income over $1 million.  They take some ideas from Senator Coburn’s report, such as cutting unemployment benefits for millionaires, and charging them higher premiums for Medicare part B and D (the parts that are not funded through payroll taxes).  They also propose closing an anomalous loophole that allows certain rich people to collect food stamps.  These latter proposals will save very little. 

Senators Heller and McConnell say that their proposal saves $230 billion over 10 years, leaving an extra $111 billion for deficit reduction.  I would point out that the $119 billion shortfall from the payroll tax cut will be incurred next year, while the overwhelming majority of the savings will occur during subsequent years.  Moreover, I’m a bit skeptical of optimistic predictions of reduction in federal employees, and by extension, deficit reduction, when those predictions are born out of random hiring freezes, as opposed to actual elimination of programs or agencies.  As long as the program or agency exists, it will somehow find a way perpetuate a need to retain its employees.  

We must also remember that there will be an additional fight over yet another unprecedented extension of unemployment benefits.  There is little sign of any appetite on the part of Republicans to fight the extension.  Will these offset cover the extra $60 billion in unemployment spending, or will they propose other “cuts?”  Again, those expenditures will be incurred immediately.

Nevertheless, I would totally support this package.  In fact, if we want to expose Social Security as a Ponzi scheme, why not agree to a permanent cut for employers as well?  At least that will engender pro-growth stimulus.  However, the million dollar question is if Republican leaders will support their own proposal.  We all know that such reductions, in lieu of major tax increases, are dead-on-arrival with Democrats.  Now that Republicans have boxed themselves into supporting the premise of the payroll tax, they must pass it even without the spending offsets.  Will they finally hold the line on their own promises this time?