We are gratified that the administration and congressional negotiators incorporated the Bipartisan Policy Center (BPC) Debt Reduction Task Force’s call for immediate stimulus through a payroll tax cut. Many provisions in the compromise are constructive steps towards emerging from the current economic downturn, and should help to spur the economy. For the same cost as this entire package, however, more jobs and growth could have been produced from a full payroll tax holiday, as Dr. Len Burman (one of our Task Force members) advocates for in today’s column. (See the Center for American Progress’ analysis of the stimulative effect of the President’s compromise package, and page 26 of Restoring America’s Future for that of the full payroll tax holiday).
More importantly, we hope that this bipartisan deal is the first step toward serious, across-the-aisle negotiations to put together a comprehensive long-term debt reduction package that will restore America’s economic prosperity. Specifically, the two-year extension of all expiring tax cuts provides an opportunity for the Administration and Congress to work on a major tax reform and simplification plan similar to those proposed by the BPC Task Force and the President’s Fiscal Commission (Concord Coalition Says Major Tax Reform Should Follow Two-Year Extension of Tax Cuts). Unless the government were to drastically scale back its commitment to Medicare, Social Security, the nation’s defense, and nearly every other function, new revenue will have to be raised, and both commissions come to the same conclusion – that overhauling the tax code and making it simpler and more pro-growth is preferable to simply toying around the edges by increasing income tax rates (see Restoring America’s Future for a full explanation of BPC’s tax reform proposal).
While it’s laudable that both sides were able to work together to build a consensus stimulus plan, it’s a lot easier to bring Democrats and Republicans together to drive the deficit up, rather than down. The real test will be when both sides have to compromise and make the tough choices necessary to put the American fiscal trajectory back on a sustainable track.