Will Payroll Tax Cut Survive Fiscal Talks?

The Bush-era tax cuts are taking center stage on discussions about deficit reduction. But the payroll tax holiday is also at risk, which could cost the typical family $1,000 a year. Host Michel Martin talks with The Wall Street Journal's Sudeep Reddy about the fiscal cliff and how the outcome could affect consumers.

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MICHEL MARTIN, HOST:

This is TELL ME MORE from NPR News. I'm Michel Martin. Coming up, when you think about Somalia - if you ever do - you probably think about terrorists, famine, and pirates. But journalist Mary Harper says too many of us, especially too many in the West - in the government and in the media - are getting Somalia wrong.

We'll talk to her about her book by that title in just a few minutes. But first, back in this country we've been talking and hearing a lot about that so-called fiscal cliff. That's the name being used to describe the package of automatic spending cuts and tax increases that will take effect at the beginning of the New Year if Congress and the White House do not agree on a plan to reduce the deficit.

And you can find people from both parties saying that everything should be on the table, but one thing we're not hearing much about is the payroll tax holiday. That affects just about everybody earning a paycheck and for the last couple of years it's been saving about $1,000 a year for a person making about $50,000 annually.

A lot of people think that tax benefit is very much in play. Here to tell us more about that and to bring us up to date on other news about the deficit reduction talks is Sudeep Reddy. He is an economics reporter for the Wall Street Journal and he's kind enough to join us, from time to time, to talk about matters of the economy. Sudeep, welcome back. Thanks for joining us once again.

SUDEEP REDDY: Thanks, Michel.

MARTIN: So tell us a little bit about the payroll tax holiday. What is it? And how is it different from the Bush tax cuts that we hear so much about?

REDDY: This is an interesting addition that came from the Obama administration two years ago and was actually considered a replacement for something that President Obama proposed during the stimulus discussions back in 2009. It was back then called the Making Work Pay Tax Credit, to give people who actually wage income who were working a regular job, as you'd consider it, give them a little more in their paychecks.

That expired and the Obama administration two years ago replaced it with this payroll tax cut that basically lowers the payroll tax rate by two percentage points. And so if you're making $100,000 that's $2,000 a year. If you're making $50,000 which is the typical household income, then that's $1,000.

And that's a lot of - that's a meaningful amount of money that goes into people's pockets. And the White House, of course, will say that this is in play, right now. It's on the table. We're going to consider this. But this is probably one of the elements of this entire $500 billion fiscal cliff package that's getting the least amount of defense.

The administration - some administration officials have sent signals over the last few months that this may not be one of those things that is extended because it was designed to be temporary. And one of the problems we're facing now, is because President Obama added his own tax cut, the Obama tax cut, onto the Bush tax cuts, tax rates for most people in the country have been lower under President Obama than they ever were under President Bush.

And now you have to unwind some of those and it has an effect on people and people's incomes in their daily lives.

MARTIN: So who is for letting the tax cut expire, which means that the payroll tax cut would rise again? And who's against it?

REDDY: If you were to look at the way the debate started two years ago, there were very few Republicans who were actually supporting this, vocally, but it was a tax cut so Republicans tend to like tax cuts and they were willing to go along with it if some other things were done in that spending and tax bill back then.

And there are some Democrats, particularly further on the left, who are still supportive of maintaining this because they like middle class tax cuts. There are a lot of groups that start to weigh in on this and they're not really huge fans of it. One reason is because this is designed partly for simplicity and to ensure that it goes to the people it's designed to go to.

It takes money away from a dedicated funding stream that would otherwise go to Social Security and through the Social Security trust fund. That money is, of course, replaced by the government in other ways. So the money is still going in a Social Security fund but it removes it from that idea of a dedicated stream. And there are groups like the AARP, the big seniors group, they've been lobbying against the payroll tax cut extension.

Because they want to remove this idea that you can go around and toy with the payroll taxes that are designed to go into other streams.

MARTIN: So they're worried that it'll weaken Social Security, overall, but I think some people might remember that there was a big push by Democrats early in the year to get this extended. They put a lot of pressure, public pressure, on Republicans through social media and really urging people to call their congress people.

There seemed to be - I don't know. Many people who sort of tap into social media might remember, you know, some of that effort. But we don't see that much right now. Why is that? Is that because everybody's so preoccupied with kind of the big package, you know, overall?

REDDY: I think it's partly because we've invested so much of our time and our energy in debating the Bush tax cuts - which elements should stay in place, which should not. And the big fight that President Obama is having right now is over a very small sliver of tax rates, the so-called top two percent meaning the top two percent of household income facing a higher tax rate.

And that is obviously a very small percentage of tax payers that we're having this debate about. And that's why the payroll tax discussion is important, because it really underscores the fact that a lot of people may take a hit from this tax debate and perhaps unintentionally. If you've been watching this debate you probably have come away thinking this is all about the top two percent rather than about tax rates for everybody else.

And we kind of need to do a better job of making everyone aware that they've been getting lower taxes and might be paying - might be losing some of that break.

MARTIN: What's the argument in favor of letting it expire? Apart from just the Social Security trust fund, per se. Because you could make an argument that's, you know, a specific interest and part of the debate here is to try to get people to look at the total picture and not just defend and dig in their heels on the thing that they care most about.

I mean, that's what you kind of hear people saying, that everybody's got to take a step back and take a breath. I mean, just - I guess what I'm asking you from a sort of overall policy perspective, is there an argument there?

REDDY: From an overall perspective you have to somehow draw the line on how much people are going to get tax breaks. And you could probably do this even further and lower payroll taxes even more, because it would benefit the economy. And there is a clear boost to economic growth when you lower payroll taxes.

There is a cost to that in the long run and that's what the debate is about. How much further should you go out in these kinds of issues? And the Bush tax rates, particularly for middle income families, are already fairly low. So if we're lowering them even further, that has to be made up somewhere else. And this goes into the larger debate about spending and taxes and what the appropriate balance is in that.

MARTIN: If you're just joining us, you're listening to TELL ME MORE from NPR News. We're speaking with Sudeep Reddy of the Wall Street Journal. He's bringing us up to date on some of the discussions that haven't been getting a lot of attention in this discussion around the automatic spending cuts and tax increases that are being talked about, trying to reduce the federal budget deficit by an agreement at the beginning of the year.

You know, it's interesting, that at the same time, we're seeing reports that consumer confidence hasn't been this high since early 2008, and at the same time we're seeing reports that businesses are investing in some of the lowest rates that we've seen in years, and really being very hesitant to invest in planned expenditures and things like that. What's going on here?

REDDY: We have a great divide right now, and it's a really troubling conundrum with this divide. Consumers are feeling pretty good about the course of the economy, possibly because gas prices have dropped a little bit. The housing market is actually staging a meaningful recovery right now, which is something that we haven't had many opportunities to say over the last five or six years.

And that is providing some confidence, some expectation that consumers are going to continue on this rebound. Businesses, meanwhile, particularly large businesses, are getting more and more concerned. It started earlier in the year, into mid-year, with the global slowdown. Europe is a mess still. Asia, particularly China, is slowing down rather quickly.

And businesses that are multinational corporations have been getting more and more worried about whether they're going to have customers buying their products overseas. And that has also weighed on them here at home, because we have relatively slow growth right now and businesses have been cutting back on their investment.

We saw, with the latest numbers from the third quarter, that business investment in equipment and in software dropped for the first time since mid-2009 and that's a really troubling sign of what could happen in the future.

Eventually, these two trends have to reconcile. Businesses and consumers can't go in opposite directions for a very long time, so either businesses will turn around, maybe they'll see some clarity from the fiscal outlook in these deficit discussions and start investing again or consumers are going to start growing worried and pull back on spending.

MARTIN: Is part of the uncertainty that businesses are concerned about related to these deficit reduction talks, this so-called fiscal cliff issue? Is that part of it?

REDDY: Absolutely. The deficit situation is one of the things that's come up over the last few years. When you ask businesses, they're worried about the outlook. They're troubled by corporate tax rates being as high as they are for the U.S. compared to other countries and they want to see some development on that front and want to get some certainty that, even if tax rates go up somewhat, they're not going to have to go up even further in the future. And so getting some kind of a package, they say will provide some clarity and help pull some of this cash that's on the sidelines.

Businesses have done remarkably well over the last three years. It's been a very slow recovery for most Americans, but businesses have had very high corporate profit rates. They've been building cash. They've got a huge stockpile of cash waiting on the sidelines, so there's some hope that, if you were to resolve some of this lack of clarity, then maybe you will actually see a big boost in investment.

MARTIN: It's always unfair to ask reporters to project, but based on what you're hearing, do you have a sense that this deficit reduction package, this so-called fiscal cliff, will in fact be - will the fiscal cliff be averted? Do you think that the parties will, in fact, agree by the deadline? I mean, the president came out yesterday and said that he hopes that this is all wrapped up by Christmas. What do your resources tell you about this?

REDDY: I don't know if we should be that optimistic that it'll be done by Christmas. I do have some feeling that we are not going to go over the fiscal cliff and stay over it for a long time. There's a lot of debate about what the cliff really is. Some people just prefer to call it the austerity bomb because it's a lot easier to talk about it that way. Some people like to call it the fiscal slope because, in direct economic terms, it's a slower, gradual effect on the economy as tax rates go up across the board.

And I think, once you actually get later in the negotiations, you'll see more pressure because there are people worried about whether Congress will, in some way, repeat what happened in the summer of 2011 with the debt ceiling negotiations where everyone thought it was unthinkable and Congress made it thinkable and that actually created some incredible damage to our economy and to consumer confidence and business confidence that weighed on us for several months and really derailed the recovery at that stage.

So I think and I really do believe that Congress has learned a little bit from that, but not necessarily enough from that and so what's probably going to happen in they'll push it closer to the deadline and create some scare in financial markets and that kind of thing leads to some changes.

MARTIN: That was Wall Street Journal economics reporter Sudeep Reddy. He was kind enough to join us once again in our studios in Washington, D.C.

Sudeep, thank you so much for joining us.

REDDY: Thank you, Michel.

MARTIN: And, for those of you listening at home, we'd also like to hear from you. If you have any ideas about how to lower the deficit, but you're wondering why Congress isn't looking at them, you can let us know. You can catch us on Facebook or on Twitter at TELL ME MORE NPR.

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