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The Democratic Strategist

Political Strategy for a Permanent Democratic Majority

Second Stimulus: Payroll Tax Cut?

One of the more alarming developments of the last couple of weeks of bad economic news has been the calm assertion by a lot of highly reputable progressive economists (e.g., Paul Krugman here and Laura Tyson here) that we obviously need another economic stimulus package from Washington. It’s alarming because the political climate for another (actually, the third of this recession counting the one that was enacted in 2008) batch of stimulus legislation is really bad, particularly with battles over critical climate changes and health care initiatives fully underway.
The first plausible idea I’ve heard for resolving this dilemma comes from Noam Scheiber at TNR’s The Stash:

Why not pair a second stimulus with the cap-and-trade legislation now working its way through the Senate? That is, you could cut several hundred billion dollars worth of payroll taxes for low and middle-income workers, the argument being that they’re the ones who’d be hit hardest by energy-price increases under cap-and-trade. As my colleague Jon Chait points out, it’s hard to imagine the GOP opposing a tax cut. And you wouldn’t need to have an entirely separate stimulus debate–you just piggyback on the cap-and-trade debate. Better still, it probably makes it easier for Democrats to pass cap-and-trade, since this defuses a key GOP criticism, which is that the resulting energy price increases will act as a tax on hard-working Americans.

As you may recall, lots of conservatives talked about a payroll tax “holiday” during the last stimulus debate. It’s one of the few tax cut ideas with a progressive impact. As as Noam and Jon say, it would at least create some problems for Republicans, who are slavering at the prospect of another “big government spending” bill to attack at a time when the last stimulus package’s impact seems to be relatively small.
Maybe the administration and congressional Democrats should just hang tough and hope that the existing stimulus spending will kick in at the right time, and that health care and climate change legislation can be enacted even if the economy’s strugging and shrinking revenues make the deficit picture look steadily worse. But if another stimulus bill truly is an economic necessity, it would be smart to get off the dime preemptively and ask Republicans if they’ve really given up their tax cut mania in favor of the green eyeshade of deficit hawkery.

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