Will the 2% payroll tax increase come soon?

Julia Coronado Dec 19, 2011

Jeremy Hobson: Now to the House of Representatives, which today will tackle the issue of whether to extend the payroll tax cut. This is the tax reduction that allowed the average American family to keep about $1,000 extra this year. It was billed as economic stimulus.

Well over the weekend, the Senate gave bipartisan approval to a two month extension of the tax cut. But now House Republicans say they’re not going to pass that extension, and they’re going to start working on their own bill.

For more, let’s bring in our regular Monday guest Julia Coronado. She is chief economist with the investment bank BNP Paribas, and she’s with us live this morning from Washington. Good morning, Julia.

Julia Coronado: Good morning.

Hobson: So obviously, there are some political calculations going on here. But what’s at stake economically?

Coronado: It’s pretty significant economically. We’re talking about 2 percent of take-home pay for all wage earners in the country. So in general we don’t think the economy has yet gathered enough steam to withstand that kind of a tax hike. It would be pretty meaningful if they don’t get this done.

Hobson: And on the other side of this, though, if they do extend this payroll tax cut, doesn’t means that there’s less money going into the Social Security trust fund, right?

Coronado: Indeed. I mean, that’s the insidious part of this, is we are underfunding Social Security with the payroll tax cut, and it’s already an underfunded program, so that really makes the longer term decisions a lot harder.

Hobson: Well, what do you think’s going to happen here?

Coronado: I think the stakes are so high that they will get something done. The debate has been over how to pay for it, but of course the whole nature of stimulus is, you don’t necessarily pay for it — you stimulate the economy now, and pay for it down the road. It’s the later part that Washington struggles with getting done.

Hobson: And they have only until the end of this year to do this?

Coronado: That’s right. If they don’t get it done, pretty much this week, then everybody sees a 2 percent tax hike on January 1.

Hobson: Julia Coronado, chief economist with the investment bank
BNP Paribas, thanks as always.

Coronado: It’s a pleasure.

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