Republican Tax Increases

If Republicans have their way, taxes will increase next year by $120 billion. Republicans in favor of tax increases? Sadly, yes.

Last year the payroll tax on employees was cut from 6.2% to 4.2%, a policy that President Obama supported. Economists from across the political spectrum have also expressed support for a payroll tax cut including Keynes, Mankiw, Robert Reich, Dani Rodrik, Tyler and myself. The CBO scored a payroll tax cut as among the most effective policies for increasing employment, although it would have been better to cut the employer side of the tax.

The payroll tax cut was temporary, however, and is scheduled to expire next year. So who is in favor of increasing taxes?

Many of the same Republicans who fought hammer-and-tong to keep the George W. Bush-era income tax cuts from expiring on schedule are now saying a different “temporary” tax cut should end as planned. By their own definition, that amounts to a tax increase.

The tax break extension they oppose is sought by President Barack Obama. Unlike proposed changes in the income tax, this policy helps the 46 percent of all Americans who owe no federal income taxes but who pay a “payroll tax” on practically every dime they earn.

House Republicans appear to be most in favor of increasing taxes although some Republican Senators have also said they want to raise taxes. The failure of Republicans on this issue lends credence to Paul Krugman’s arguments:

How can [Repubicans not want to cut the payroll tax], when Republicans love tax cuts? The answer is, they don’t. They love tax cuts for the rich. Tax cuts for ordinary workers, many of whom will be those hated lucky duckies whose incomes are too low to pay income tax, are if anything something Republicans dislike.

Also, the GOP is against any idea that (a) comes from Obama (b) might help the economy before the 2012 election.

To their credit Romney and Gingrich are more supportive:

Former Massachusetts Gov. Mitt Romney did not flatly rule out an extra year for the payroll tax cut, but he “would prefer to see the payroll tax cut on the employer side” to spur job growth, his campaign said.

Former House speaker Newt Gingrich said Republicans will fall under increasing pressure to extend the payroll tax cut. If they refuse, he said in a recent speech, “we’re going to end up in a position where we’re going to raise taxes on the lowest-income Americans the day they go to work.”

Unfortunately, outside of the White House, Democrats are also not pushing for an extension of the tax cut.

Many Democrats also are ambivalent about Obama’s proposed tax cut extension. They are more focused on protecting social programs from deep spending cuts.

It’s a bad idea to raise taxes on working Americans in a weak economy and with interest rates so low the gains from reducing the deficit from current spending are low. Our political system is so dysfunctional, however, that Republicans may fail to support effective tax cuts precisely because a Democratic President regards them as important for economic growth.

Hat tip: Erik Brynjolfsson


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