Slash the deficit! (But cut the payroll tax)

By Annalyn Censky, staff reporter

NEW YORK ( -- Tucked in among the controversial spending cuts proposed by President Obama's debt commission Wednesday, was a little piece of stimulus -- a tax break that could benefit workers.

Americans may not have to pay payroll taxes for part of next year, if the plan were to be passed by Congress and the President.

The plan -- which proposes slashing $4 trillion off the nation's debt over the next 10 years -- recommends that lawmakers consider a so-called payroll tax holiday as an economic stimulus measure.

The "holiday" would be one-sided, meaning it would apply to either employees or employers, but the report is not clear on which. Each currently pay about 6.2% of a worker's salary, up to the first $106,800 of income, to fund Social Security.

While most measures in the debt commission's plan seek to reduce the nation's staggering deficit, cutting payroll taxes, at least for part of fiscal year 2011, would actually cost the government between $50 billion and $100 billion in lost revenue, the report said.

The trust funds of Social Security and Medicare, which are normally supported by the payroll tax, would instead be reimbursed from general revenues in 2011.

Still, the debt commission said, it would be worthwhile because a payroll tax holiday "would result in significant short-term economic growth."

Earlier this year, the nonpartisan Congressional Budget Office estimated that eliminating payroll taxes could be roughly two to four times more effective in spurring economic activity than a reduction in income taxes.

While it would seem like a win for Democrats, who generally support more stimulus, and Republicans, who advocate for more tax cuts, the proposal has garnered very little support from most Washington lawmakers.

Democrats appear to be more concerned about weakening the financial support behind Social Security, and Republicans are more focused on extending the Bush-era tax cuts for top wage earners.

Sen. Judd Gregg, a Republican from New Hampshire who sits on the debt commission, said he plans to vote in favor of the overall plan, but he disagrees with the payroll tax recommendation in particular.

"The economy will recover if we don't raise taxes, but an additional tax cut may not help," said Gregg, who argues the first round of stimulus rebate checks, totaling about $90 billion in 2008, failed to significantly boost the economy.

Some leading economists are also skeptical.

At a time when consumers are still cutting back their spending and revving up their savings instead, some argue a payroll tax holiday would be ineffective as a stimulus move. Workers may just put the extra dollars away as an investment or use them to pay down their existing debts.

"In terms of addressing long term needs, I don't think anybody thinks America's problem is we had too little consumption," Nobel Prize-winning economist Joseph Stiglitz said Wednesday. "This is really an instrument for increasing consumption, and so I would prefer, if you're going to give some tax cuts, to focus it, one way or another, on investment that produces bang for the buck."

Instead, Stiglitz said, the most effective "bang for the buck" move would be to renew federal unemployment insurance, which expired Nov. 30.

Called "The Moment of Truth," the debt commission's report is an amended version of a plan put out three weeks ago by the panel's co-chairmen, Erskine Bowles and Alan Simpson. The bi-partisan debt commission is scheduled to vote on the recommendations Friday, and 14 of its 18 members would need to support them before it can bring an official proposal to Congress.

Just two weeks ago, a separate debt-reduction plan by the Bipartisan Policy Center's Debt Reduction Task Force -- a non-government group -- also recommended a payroll tax holiday, but for both employers and their workers, and for an entire year.

Eliminating the tax to that extent would cost the government $650 billion, but create between 2.5 million and 7 million jobs, their report said.

-- Staff writers Jeanne Sahadi and Chris Isidore contributed to this report. To top of page

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