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Commentary By Josh Barro

Washington Sickness Seen In Payroll Tax Fiasco

Economics, Economics Tax & Budget

This week’s payroll-tax shenanigans have been almost a parody of Washington dysfunction, with politicians engaging in brinksmanship over a policy -- another year of reduced payroll taxes -- that everyone seems to agree will be enacted in the end.

In the meantime, a 60-day extension of the tax holiday and 99-week unemployment benefits, as passed by the Senate, is a pretty silly policy, but at this point there is no hope of an agreement on a full-year extension within the next 10 days.

The House should pass the Senate bill, and then House and Senate members should get together in early January to work out a full-year extension for both policies as quickly as possible -- and they shouldn’t worry about “paying for” it.

Economic conditions remain roughly the same as they were a year ago. A payroll-tax holiday remains justified for the same reason it was in 2011. It will increase the purchasing power of middle-class households and help support consumption that creates jobs.

Similarly, extended unemployment benefits support consumption and are unlikely to induce much additional unemployment, because there are far more job seekers than job openings.

Recent weeks have seen some promising economic indicators, including lower unemployment claims and more housing starts. If these trends continue, then pulling back on the payroll tax holiday and on extended unemployment benefits at the end of 2012 might be justified. But a 60-day extension just isn’t enough time.

Congress has gotten hung up on the issue of how to “pay for” the payroll tax holiday, and indeed the main reason the Senate passed a 60-day extension is that bipartisan agreement could only be reached on enough “pay-fors” to cover 60 days. But the idea of a “pay-for” is a red herring and should be abandoned.

First of all, the pay-fors are measured over an arbitrary period of 10 years. Because the payroll-tax holiday and extended unemployment benefits are costs that occur upfront, even a “paid-for” extension raises the deficit in the near term, to be offset by smaller deficits later.

There is no magic about a 10-year window; measuring over five years or 20 would lead to different conclusions about what policies are deficit-neutral.

More importantly, the payroll-tax holiday is a fiscal stimulus measure: The whole point of the policy is that it leads to larger deficits for a period. The needs for fiscal loosening in the short term and tightening in the long term are real, but that does not necessarily mean they should be included in the same bill.

A pay-for requirement might make sense if we are worried that, once the economy improves, Congress won’t have the tools it needs to do the necessary fiscal tightening. But five automatic triggers are already in place that would sharply shrink deficits in the coming years without any congressional action.

One is the “sequestration” requirement from this year’s debt-ceiling compromise, which will automatically shrink the budgets of most government programs starting in 2013. A second is the expiration of the Bush tax cuts at the end of 2012.

A third is the Alternative Minimum Tax, which would affect many more households if Congress did not annually adjust the tax threshold. A fourth is Medicare’s Sustainable Growth Rate mechanism, which reduces payments to doctors and hospitals absent congressional interference. And a fifth is the debt ceiling, which will be reached again in 2013.

Of course, Congress can override any of these triggers, and it routinely does. Already some talk about unraveling the “trigger” mechanism from the debt-ceiling deal enacted just months ago. But when Congress fights over which 10-year pay-fors to attach to the payroll-tax holiday, it’s really fighting over the creation of a sixth trigger, which future Congresses could also override.

The reality is, today’s Congress can’t force future Congresses to shrink the deficit. We should turn to reining in the deficit when the economy is stronger--and focus now on creating jobs.

This piece originally appeared in Washington Examiner

This piece originally appeared in Washington Examiner