Whatever its past political advantages, the payroll tax now imposes an unnecessary burden on a stagnating economy. In an era of mass unemployment, mediocre wage growth and weak mobility from the bottom of the income ladder, it makes no sense to finance our retirement system with a tax that falls directly on wages and hiring and imposes particular burdens on small business and the working class.
What’s more, the payroll tax as it exists today can’t cover the program’s projected liabilities anyway, and the pay-as-you-go myth stands in the way of the changes required to keep Social Security solvent. All of the components of a sensible Social Security reform — means-testing for wealthier beneficiaries, changing the way benefits adjust for inflation, a slow increase in the retirement age — become easier if the program is treated as normal safety-net spending rather than an untouchable entitlement with a dedicated funding stream.
By cutting the tax rate and promising to make up the difference out of general revenue, the payroll tax holiday took a big step in this direction — and letting it expire would take a big step back. Republicans have every reason to recognize this reality: their long-term size-of-government goals require Social Security reform, and the illusions fostered by the payroll tax are an obstacle — originally created by their political enemies! — to any restraint in what the program spends.