Arnold Kling  

Social Security Tax Cut?

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A proposal from former Labor Secretary Robert Reich:


The best and the fastest way to get more money into the pockets of people who are likely to spend it quickly is to cut the taxes of average working people. Most people pay more in payroll taxes — primarily for Social Security and Medicare — than they do in income taxes. So a temporary cut in payroll taxes — say, by exempting the first $15,000 of income from payroll taxes — would put an extra $1,200 into most working people's wallets this year alone. And because businesses wouldn't have to pay their portion of that payroll tax, they'd be encouraged to keep more workers on the payroll.
...The best way to make sure Social Security is there for boomers is to get this economy moving again, as quickly as possible.

For Discussion. How would the fact that the proposed tax cut is temporary reduce its demand-side and supply-side stimulus?


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COMMENTS (3 to date)
David writes:

"How would the fact that the proposed tax cut is temporary reduce its demand-side and supply-side stimulus?"

The reason it would reduce the demand-side stimulus is that people will know that this just means a tax increase later and will save accordingly. The offsetting effect, however, is that a lot of people who would be getting money from this are presumably under borrowing constraints, which would negate the aforementioned "Ricardian" effect.

As for "supply side-stimulus", I guess I just find it weird to see those two terms together. I have always thought of "stimulus" to mean a short term boost to the economy, but the problem right now isn't that we don't have enough goods and services to go around--it's that we don't have enough demand to buy the goods and services available. I think what you're getting at is the long run supply-side effects, which are nil in this proposal since incentives aren't altered if this is only temporary.

Scott writes:

Because the tax cut would be temporary, most people won’t alter their behavior. Hence, although they might spend the temporary windfall, longer term, demand won’t change. Businesses know this as well. So while they might clear out some inventory, they won’t change production plans and hence won’t hire any new workers.

A temporary payroll tax cut isn’t going to do any more good than the $300 and $600 checks did last year.

As a side note, it’s refreshing to see a liberal Democrat admit that the Social Security Trust Fund is “nothing more than an accounting device.” Perhaps now at least some of the politicians will be able to treat it as something less than sacrosanct.

Eric writes:

Is there any question that a temporary tax cut will do nothing to spur the economy? Reich should know better.

Also, the payroll tax is not a tax, it's a payment into a pension system (or so the ruse that is Socialist Insecurity goes). It would seem to me that a cut in the payroll tax WOULD have Ricardian implications. People WOULD save the tax cut because their Social Security pension will be smaller because of the cut.

What I find interesting is that a leftist like Reich is willing to gut the funding mechanism of the social welfare program that has done the most to keep the Democrats in power. If the payroll tax can be cut without political consequence to Republicans, then Social Security can be privatized without political consequence.

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