Bryan Caplan  

Some Counterproductive Candor About a Payroll Tax Cut

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I'm surprised to learn that a payroll tax cut actually has some political traction.  A few insiders are even highlighting its unique benefits:
"Cutting the payroll tax is a great idea. It not only puts money back in people's pockets -- particularly for working- and middle-class Americans -- but it reduces labor costs for employers because they pay half of the tax," said economic strategist Cesar Conda, who was Vice President Dick Cheney's chief domestic policy adviser.
I fear that this candor could actually hurt the idea - who wants to cut a tax on employers?  But it's still nice to hear a little economic sense in the news. 

P.S. While I'm on the subject of counterproductive candor, I'm not so worried about hurting Social Security's solvency because I think it should be abolished anyway...


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COMMENTS (19 to date)
KipEsquire writes:

But as we all know, employers do not "pay" half of FICA taxes. No business ever "pays" any taxes. Businesses merely remit taxes. Only people pay taxes -- either as workers, customers or investors.

And, last time I checked, the unemployed don't pay FICA taxes. So this helps -- whom and how?

It's just another vote-buying middle-class entitlement. Please let's not pretend otherwise.

tim writes:
And, last time I checked, the unemployed don't pay FICA taxes. So this helps -- whom and how?
It puts more money into the hands of the employed, who go out and buy stuff, which stimulates the economy. And it makes it cheaper to hire new employees.
zanon writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog.--Econlib Ed.]

I quote the observations of Milton Friedman, and Russel Roberts at CafeHayek. The amount of tax that a government imposes is the amount it spends. The timing and amount of tax collections is merely finance.

So, Obama's plans are a massive tax increase which will be spent or distributed. The government will have to collect taxes to fund this spending, either now or in the future. If it borrows the money, the taxes will include increased interest payments on that debt. If it merely prints the money, there will be inflation along with devaluation of the dollar. Or, Obama can try to carry out his announced plan to make the top 5% of taxpayers finance the increases.

It is a brilliant redistribution plan that uses the current progressive tax system, plus "a bit more", to soak the rich in a way not seen since 1960. At that time, tax rates were 91%, and politics was about creating tax loopholes to keep the economy going.

I think we are going to see misdirected public spending and "investment", reduced private investment and production, much higher marginal tax rates on the rich (the productive), unemployment, and inflation (stagflation), as Obama does anything to avoid taxing the lower 95% or 70%, and to avoid reducing government distribution and spending.

Easy Opinions

John Spencer writes:

Every comment I read about any of this stimulus is negative. So here is what I suggest, no stimulus at all, none, zilch.

Cut $500 billion out of the federal budget. As we know there is a lot of waste, so it should be easy. $500 billion is only the salary of about 3 million people, which based on comments, we don't need anyway.

No unemployment benefits beyond the original 39 weeks. And I even question that, it is a waste in government spending anyway.

As for social security, eliminate it. We all know that people will take the 6% they pay into social security and put it into a retirement savings program.

As for soaking the rich, forget it, let them keep their tax money. Afterall, it's hard to get buy on $100 million a year, or even more. Check the wages for the CEO of Alcoa. He only made $150 million in 2007, and the Company is in the tank.

For that matter, no money to the States from the Federal government. What do they need it for anyway, they are supposed to cut their budgets too.

Now, you know I don't think we should do this, but if you read peoples comments, that is what it sounds like people want to do, so lets do it.

John Spencer writes:

I don't agree with the fear of inflation and the value of the dollar, but I am probably in the minority.

Based on economics, inflation is caused by too many dollars chasing too few goods or availability of services. We are very far from that point right now. We have 40% excess capacity in the auto industry now, we have a huge surplus of available works, we have millions of surplus houses. Nothing is getting built, so we have massive supluses in metals, oil, plastics, and even agricultural products. Check the prices of these things, most are less than half their price of a year ago. Why, no one needs/wants them.

Deflation is caused by too few dollars chasing too many goods. That is what we have now. That is why there are so many sales, and if a company cannot get a profit, they cut wages.

The problem that we face, deflation to the point where companies cannot survive, so they shut down, in essence cutting capacity. Now we have too few dollars chasing too few goods available, and we will get hyper inflation. And we haven't printed a thing.

Yes, if we make too many dollars available, we can induce inflation by making too many dollars available. But what is rarely mentioned, we have nearly $8 trillion dollars less money in the economy than we did a year ago through asset devaluation. And what happens, what we have today, no one is letting their dollars go. Deflation is already happening. I read where 3 million people are now working on a reduced work schedule in an attempt to save their jobs. So we will continue to have too few dollars out there.

As for the dollar, well I for one feel the dollar's value is more dependent on the relative strength of the economy to other Countries. Point in case, we have dropped our interest rates from 4.5% to zero. The dollar was at $1.37/euro in August, 2007. What is it now? $1.36/euro as of yesterday (2009). So where is the correlation? It doesn't always exist because there are way to many other factors involved.

Anyway, my thoughts, disagree if you like.


Jody writes:

John Spencer: Rather than saying folks are implicitly making the argument - I'll make it explicit.

I endorse your plan of 9:13 AM.

John Spencer writes:

Jody, then what is the implication of this. There is always the other side of the story.

wintercow20 writes:

Ignoring the politics for a moment, how come so little mention that this is a lump-sum payroll tax cut and not a reduction in rates? It is an enormous difference. My suspicion is that this type of cut will have virtually no impact on the extensive labor supply margin, which is supposed to be a major reason for all of this stimulus, no?

Back to the politics ... because it is lump sum, a one-shot deal, is why I think it has traction. Plus it is easier to demonstrate that it is being targeted at the non-rich.

John Spencer writes:

Wintercow, there is nothing settled yet whether the tax cut will be lump sum or payroll tax reduction. And if someone is not working, then what do they get, most likely a tax rebate against earned income in 2008, assuming they worked in 2008.

There are so many things that interplay with each other that any option proposed has numerous special situations that makes it imperfect.

Personally I don't like the rebate approach. We did $150billion before, and could not see the impact. Now we are talking $300 billion for the tax cut and will likely not see any impact again.

Ultimately consumers/consumption will have to lead us out of the recession, but we need a trigger/spark to start consumerism again. No one has a magic wand to start it. A tax rebate will to some seem like a spark. But the issue is a person gets a $1500 check, spends it, and then is in the same situation they were before, so it's impact is not sustainable.

I have no idea what the right trigger will be to get us going again, so I will refrain from offering any comment on a solution.

wintercow20 writes:

I'll pipe down after this ... but real consumption is hardly plummeting. In fact, it is roughly flat since beginning of 2007. Second, what would the world look like if all individuals wanted to consume less? After all, this is the goal of many folks out there. Would we pursue government policies to force us all to consume more and work more to accommodate that?

Jody writes:

Jody, then what is the implication of this. There is always the other side of the story.

Not to be obtuse, but there's too many indirect objects in your reply for me to respond with any specificity.

So I'll speak in the general - I believe this to be a textbook Austrian recession (popping of a speculative bubble created by an extended period of too easy credit / money) for which a stimulus (and virtually all government intervention) will actually make matters worse.

Dlurker writes:

Bryan,

It seems like you're going on the assumption that the less solvent Social Security is, the easier it will be to get rid of. My intuition about the politics of the program is exactly opposite: An [even more] insolvent program would just be met with calls for another czar [with the educated left using "The Social Contract" argument, and others using markedly less subtle rhetoric] cries about how defined contribution plans have failed us, how Social Security [rather than increases in productivity] has ensured that we don't see people starving in the streets, etc.

On the other hand, if Social Security were somehow to be not only solvent but profitable, this could lead to calls to increase the mandatory contributions, justified with a behavioral argument.

rhhardin writes:

The payroll tax is our best tax, a flat tax. The goal should be to increase it, remove the cap, and apply it to all income.

At the same time, offset it by reducing or elminating the income tax.

A move to reduce the payroll tax, on the other hand, makes the tax system even more progressive.

floccina writes:

Amen to this:

But if that's too harsh for you, there's still every reason to make old-age payments as stingy, means-tested, and stigmatized as welfare payments.

2 great things about getting rid the SS tax.

1. It ends the I paid for it argument for not lowering and means testing the benefit.

2. It lowers wages in a time when the value of money is rising.

floccina writes:

Amen to this:

But if that's too harsh for you, there's still every reason to make old-age payments as stingy, means-tested, and stigmatized as welfare payments.

2 great things about getting rid the SS tax.

1. It ends the I paid for it argument for not lowering and means testing the benefit.

2. It lowers wages in a time when the value of money is rising.

Dan Weber writes:

If we suspend the payroll tax, any attempts to change Social Security into some kind of ownership system will be dead, since we will have totally disconnected payments in with payments out.

I'm not sure anyone would notice, though, as any hope of privatizing SS was already bordering on the impossible.

Mr. Econotarian writes:

A thought: You can eliminate the payroll tax for the bottom 40% households by income ($120 billion) and pay for it with a $0.84/gallon gasoline (aka carbon) tax.

Unfortunately, getting rid of all $800 billion of the payroll tax is much costlier.

David Muscat writes:

Businesses don't pay taxes? That's interesting. In fact, business must match the employee portion of the payroll tax, so businesses are not just remitting taxes. Yes, taxes on public corporations are eventually passed through; however, in the case of a private company the owners certainly end up "paying" for the employer portion. The implication that a payroll tax imposes no costs or economic distortions on business activity is ludicrous. I agree that a payroll tax cut is a sop to the middle class. However, as long as we're cutting it the whole system should be abolished.

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