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Why Republicans Don't Want To Extend The Payroll Tax Cut

The first item on President Obama's agenda, and also the most apparently straightforward way to avoid imminent harm to the economy, is to extend the payroll tax cut next year. It's a tax cut, Republicans should favor it. You know, the worst thing you can do in a recession is raise taxes, as they've said a billion times? Easy call, right?

Wrong. Here's Paul Ryan, asked about extending the payroll tax cuts:

This is the same economic reasoning, policies and logic that the president used to sell his stimulus. He said it would keep unemployment from getting above 8 percent. It didn't. It gave us $1 trillion in debt hang over. It would simply exacerbates our debt problems in my opinion. I won't go through every one of those individual issues like unemployment insurance and others. But I really think we should do tax reform.
See? Those things are all temporary. They are demand-sided. And they are proven not to work and they still facilitate uncertainty for businesses.
And so, what's plaguing our economy today, especially for the small businesses who create most of our jobs is this just increases the amount of uncertainty as to what the future holds for them on regulations, on taxes, on interest rates and all of those things. So, this exactly exacerbates those problems.

So now we can't extend a temporary tax cut because it would exacerbate debt. Ryan is expounding here the extreme, anti-Keynesian viewpoint that has overtaken the Republican Party, which emphasizes the benefits of fiscal contractionary policy. Apparently this now even extends to tax cuts.

The first thing you have to understand about this position is that nobody within the Republican Party advocated it during the previous recession. Here's Ryan in 2001, arguing for stimulative tax cuts on precisely the grounds he now deplores:

I like my porridge hot. I think we ought to have this income tax cut fast, deeper, retroactive to January 1st, to make sure we get a good punch into the economy, juice the economy to make sure that we can avoid a hard landing.
The concern I have around here is that everybody is talking about let's wait and see, let's see if they materialize. Well, $1.5 trillion have already materialized in the surplus since then-Governor Bush proposed this tax cut in the first place. The economy has soured. The growth of the projections of the surpluses are higher. So we have waited and we do see, and it is my concern that if we keep waiting and seeing we won't give the economy the boost it needs right now.

To recap: In 2001, we faced a mild downturn, one which monetary policy was more than adequate to address. Ryan was nonetheless enough of an ultra-Keynesian to insist on immediate stimulative tax cuts to boost demand. Now, we face a massive economic crisis and the Federal reserve is almost out of ammunition. Now Ryan has been converted to an odd, economic doctrine that insists on imposing contractionary fiscal policy. I'm sure that in Ryan's mind, there's some deeper principle at work than "stimulate the economy under Republican presidents and de-stimulate it under Democratic presidents." But that is functionally the Republican position.

This little noir tale actually has a couple darker twists. Some Republicans are floating the possibility of trading the payroll tax cut extension for a tax break for repatriating overseas corporate funds:

Republicans are wary of renewing the tax break. A senior GOP aide said they will want to assess how many jobs were created because of it and evaluate its impact on the deficit before making a decision.
"I don't think most employers will tell you it motivates them to make a hiring decision," said tax lobbyist Ken Kies, managing director of Federal Policy Group.
Some Republicans have backed other strategies for boosting the economy, including temporarily lowering the tax rate for bringing U.S. corporate profits held overseas back home, known as a repatriation-tax holiday. ...
One way to entice Republican support would be combining the payroll tax break with the tax break for repatriating U.S. corporate funds, a proposal popular among many major U.S. businesses.
"There's a lot of near-panic about the jobs situation," said Mr. Kies. He said partnering the two tax breaks "might be enough to bring the political support necessary."

Attentive, long-time TNR readers may perk up their ears at the mention of Ken Kies. I profiled Kies in 2000. Kies is an intermittent Republican tax adviser and lobbyist for the shadiest, least justifiable tax dodging maneuvers that can be concocted and/or protected. Often he seems to be serving both functions at once. The association of Kies with an idea is a bright red signal that the idea in question is a way for some company or wealthy individual to fleece the public interest. And, sure enough, that is what this corporate repatriation plan would do:

Proponents argue that a second temporary repatriation holiday would boost domestic investment and jobs, which is the same pitch that proponents used to sell policymakers on a similar repatriation holiday in 2004 – and one with obvious resonance as the economy struggles to recover from recession and unemployment remains very high.
Nevertheless, the evidence shows that the first holiday failed to produce the promised results. Its primary effect was to provide a huge windfall to the shareholders of a small number of very large corporations.
Moreover, a new tax holiday would increase budget deficits by tens of billions of dollars over the coming decade. And unlike the 2004 repatriation holiday, which was sold as a “one-time-only” event, a second holiday would send a powerful message to corporations to shift investment and jobs overseas and hold the profits there — until yet another tax holiday is declared. Indeed, enactment of another such tax holiday would further embed the shifting of investment, jobs, and profits overseas as a major tax avoidance strategy for many U.S. multinational corporations.

It would also increase long-term deficits:

So that's the likely shape of the battlefield now. Republicans oppose a payroll tax cut extension that does not add significantly to the long-term deficit on newfound anti-deficit grounds, unless it can be traded for another, far more regressive tax cut that does significantly add to the long-term deficit. Then they'll demand that either Obama submit to that policy or be complicit in an economy-harming tax hike.