Does Congress "Need" Revenue from Payroll Tax?

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Monday, 01 October 2012 04:17

A generally informative NYT piece on the expiration of the payroll tax cut at the end of the year told readers:

"The original point of the payroll tax holiday was to stimulate consumer spending and aid middle-income households. But now Congress needs the money as it struggles with vast deficits and believes the economy can withstand the expiration."

It is not clear in what way Congress "needs" the revenue nor why it faces any objective need to struggle with "vast" deficits. Nor is there any obvious way in which the economy is better situated to withstand the lost demand that would result from the expiration of the tax cut than it was last year.

Of course deficits are large precisely because the economy is weak. If the economy were near its full employment level of output, then deficits would be modest with the debt to GDP ratio stable or falling. The decision to focus on deficits is a political one that has no obvious economic rationale. While most of this information actually appears in this article, this paragraph presents an interpretation of events that is almost directly at odds with the reality.