Could The Payroll Tax Cut Become Permanent?

The payroll tax cut is designed to be temporary—which is one of it’s biggest defects. But Mike Konczal at Rortybomb points out that politics may cure this defect:

“It’s clear that it would be an ugly battle to raise this payroll tax in 2012 when unemployment will likely be 8%+,” Konczal writes. (Note: this is leading Konczal and other liberals to worry that the payroll tax cut might be a bad idea.)

This is a point I haven’t taken into account yet. It raises the possibility that the payroll tax actually could lead to more spending—if the public believes that it will be made permanent and therefore create a permanent increase in income. I’m still not convinced this would happen, however, because I suspect the appetite for savings and develeraging exceeds the actual ability of cash-strapped households to save.

There’s a deep irony here. The payroll tax cut might work as intended—encouraging spending—but only if the public believes that it won’t be as limited as the Obama administration plans.