Washington

THE payroll tax cut being debated in Congress is one of our last, best hopes to break the spell of unemployment that continues to hang over the economy. If both parties fail to reach an agreement, the economic and political consequences will be devastating. There is a way out, but it requires an understanding of why payroll taxes are particularly bad for economic growth.

Payroll taxes are the most regressive taxes most Americans pay with respect to current income, and one of the biggest drags on workers’ pay. Cutting them stimulates demand by giving more money to more of those who spend it. (President Obama’s proposed payroll tax cut — part of his American Jobs Act — would leave 161 million workers with larger paychecks in 2012, the Treasury Department estimates.) Employers would also benefit from payroll tax cuts, but only when they hire, so any cuts to the employer portion would be targeted to job creation alone. Over the past 75 years, with the creation and growth of Social Security and later Medicare, payroll taxes have ballooned from 10 percent to around 40 percent of federal revenue, rivaling income tax.

Taxes on payrolls effectively encourage the overconsumption of resources like energy and land and the underutilization of labor. Historically, this increased labor productivity, but also decreased employment by tens of millions of jobs. To correct the imbalance, we must cut payroll taxes, as other advanced industrialized countries have done.

The payroll tax for Social Security is 6.2 percent of wages (up to an annual maximum of $106,800). This year, the employee’s contribution was reduced to 4.2 percent, while the employer’s portion stayed at 6.2 percent.