If you needed any convincing that a payroll tax holiday was a form of fiscal stimulus that Republican just might buy into, Bruce Bartlett’s opposition to the idea is probably prima facie evidence:
Pete Domenici and Alice Rivlin have proposed a one-year payroll tax holiday to stimulate the economy. I have previously explained why I think monkeying around with the payroll tax is a dreadful idea and won’t repeat my argument here. Today, I just want to ask one question: What are the odds that Republicans will ever allow this one-year tax holiday to expire? They wrote the Bush tax cuts with explicit expiration dates and then when it came time for the law they wrote to take effect exactly as they wrote it, they said any failure to extend them permanently would constitute the biggest tax increase in history.
I strongly suspect that most Democratic opposition to a payroll tax holiday would be along just these lines—branding it an assault on Social Security.
I don’t have quite the opposition to letting Social Security become a welfare program that Mr. Bartlett has. So, for example, I think that means-testing Social Security is a perfectly reasonable idea and that’s another step on the road to letting Social Security become a welfare program. I understand the argument.
For the umpteenth time my views on fiscal stimulus are that I’m prepared to believe that a well-timed and well-designed spending package can produce more growth in the near term than it costs, i.e. it has a multiplier greater than 1. I’m just skeptical that the Congress is capable of enacting a well-timed and well-designed spending package.
If monetary policy is tapped out and another spending spree is out of the question, tax cuts are about the only game in town for fiscal stimulus and as tax cuts go a payroll tax holiday is a lot better than reducing marginal income tax rates.
It’s all about the area under the curve – tax revenue over time.
I wouldn’t have a problem with a payroll tax holiday, if it was balanced by other changes bending that revenue curve upward in the next few years.
The arguments are again, dubious.
1. He assumes an empirical question is true, that the employees pay 100% of the payroll tax, both the part levied on them by law and also the part levied on employers. While this maybe true in some cases, claiming it is true in all cases is doubtful.
2. Second he resorts to the aggregate demand claim, problem is that what the economic theory says is that firms will utilize more labor in production, over all output from the firm doesn’t have to change. Granted changing capital-labor ratios would take time, but it could still result in an increase in employment. Again, not a view that can be answered by pure theory.
3. He then uses his assumption in 1 along with the temporary nature of the tax cut to justify his claim that the pay increase would go only to those who have jobs, thus not creating a secondary round of job creation.
His best argument is that yeah, once cut it will be hard to return it to its initial value and right now Medicare and Social Security need revenue increases not decreases, or cuts to the rate of spending growth. That is his best objection. Of course balancing it with another phased in tax on say gasoline would be my preferred option. Making both permanent as well. Heck, I’d rather have the gasoline tax replace the payroll tax.
I strongly suspect that most Democratic opposition to a payroll tax holiday would be along just these lines—branding it an assault on Social Security.
Why not thread the needle a bit more carefully in order to avoid the charge that this is an attack on SS by simply maintaining worker contributions and giving the employers a holiday on their contribution? This still keeps some revenue flowing into SS “trust funds” (ha ha) but what it does is it reduces the cost of job creation for the employer. Tie eligibility to job creation – every $x in new payroll allows a tax holiday on $y in existing payroll. Maybe even kick in on state WCB premiums and other employer obligations tied to employees.
I would prefer payroll cuts over income tax cuts. I dont expect either to do much. Corporations have cash. The inventory of real estate needs to be worked through the system. Private savings need to rebuild.
Steve
Tie eligibility to job creation – every $x in new payroll allows a tax holiday on $y in existing payroll. Maybe even kick in on state WCB premiums and other employer obligations tied to employees.
TangoMan, that would just create another gaming opportunity for the bigger companies. Billy Bob’s HVAC Install & Repair down the street might not be able to do much with that credit other than to do what was intended. But what about WalMart? If they’re opening new stores anyway they can now claim the credit. Or a company in trouble could let people go before the law takes effect in order to get the break when it rehires workers. And the seasonal effects on retail. Et cetera.
This is the problem with any of these “targeted” credits and tax breaks – they’re just complicated enough to game, and thus channel markets in directions they normally wouldn’t flow. It’s kind of like the Army Corp of Engineers directing the flow of the Mississippi – no matter what they do Old Man River’s going to overflow the banks at some point. It’s just what he does.
Corporations have cash.
steve, most of the corporations that have cash have even more in liabilities. Mish has covered this topic several times.
that would just create another gaming opportunity for the bigger companies.
I agree. Gaming is going to be hard to avoid but it’s probably preferable to the outright politicization of disbursements from spending initiatives. There seems to me to be a push factor involved here which is best summed up as “Do Something!” and so it becomes a process of finding the least worst alternative.
I still prefer deploying money to help pay people to leave the US. Set up some criteria, target those who are chronic net-tax recipients and not yet citizens and give them an incentive to make a better life elsewhere. Their departure reduces current and future liabilities and makes the remaining workforce marginally more productive. After all, the deficit problem is directly tied into the problem of subsidizing the retirement and medical expenses of people who haven’t contributed enough in premiums to compensate for the expenses that they’ll present. It worked in France, so it’s not completely outlandish, though it does run directly against core American myths.