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Hanna: With Payroll Tax Holiday, Good News Is Bad, Bad News Is Worse

In President Barack Obama’s speech before Congress earlier this month laying out his new jobs plan, he called for extending the payroll tax holiday. The proposal would allow Americans to keep more of their income, which allegedly stimulates the economy by encouraging greater consumer spending.

In reality, it’s a failed policy with destructive consequences.

The holiday results in the typical family bringing home $1,500 in additional income. Who wouldn’t welcome such a bonus in take-home pay? But does it actually stimulate the economy, the stated purpose of the proposal?

Anyone who hasn’t been living under a rock for the past year has to agree that the current payroll tax holiday surely hasn’t. There are several factors why it has failed. Those persist and thus ensure another extension will also fail to stimulate the economy.

First, with consumer debt at unsustainable levels and the average American now holding $10,700 in credit card debt, many consumers have used the additional take-home pay to help settle their credit card debt.

Second, with consumer confidence at an all-time low, fueled by declining home values — which is most Americans’ greatest store of wealth — and the outlook of a bleak economy, millions are fearful of spending and are now predisposed to saving.

Largely because of these two factors, there wasn’t as dramatic of an increase in consumer spending as the administration was hoping for. With these factors persisting, don’t expect any material stimulative effect brought by another extension.

Importantly, the tax relief also isn’t robust enough to have noticeable supply-side effects. A temporary $1,500 tax relief does little to nothing to encourage entrepreneurs to open shop, expand and hire new workers. It’s simply too small and lacks the permanence job creators need to make prudent business decisions.

The worst part of a payroll tax holiday is that the negligible stimulus effect is the good news.

The bad news is that the proposal hastens the insolvency of Social Security by reducing the amount of money going into the trust fund.

Here are the facts. According to the 2009 Annual Report of the Social Security and Medicare Board of Trustees, by 2017 Social Security is expected to start paying out more than it collects in payroll taxes. The surplus will be exhausted by 2037, at which point benefits may be cut by as much as 25 percent.

Increasing the likelihood of Social Security benefit cuts while doing nothing to generate more jobs, which is precisely what Obama’s payroll tax holiday would do, is wacky public policy, to put it kindly.

The president should put aside this misguided proposal and embrace some of the common-sense growth proposals currently on the table.

For example, he should put his support behind bipartisan discussions on changing how American companies’ foreign profits are taxed.

Today, we are the only country in the world that taxes profits earned in another country, to boot at a 35 percent rate that has encouraged U.S. companies to keep more than $1.4 trillion abroad that they would prefer to bring home to create jobs here, open new research and development facilities, and pay dividends to American shareholders.

We can encourage them to do so and unleash significant free-market growth through a complete repeal of or a permanent significant reduction of the double tax on repatriated profits.

It’s time for the president to embrace common sense.

That’s the good news.

Colin Hanna is president of Let Freedom Ring, a public policy nonprofit based in Pennsylvania.

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