Why is a FICA cut better than a federally-funded sales tax holiday? The latter: - affects everyone, not just workers - is progressive - encourages consumption without delaying deleveraging
The big advantage of a sales tax holiday is that, like an investment tax credit, it is a temporary tax cut that stimulates spending. Other temporary tax cuts, such as rebates, tend to be saved. In a Keynesian world, you don't want saving.
I'm not so sure that the problem we have now is excess saving, so I want to hedge my bets. My idea (originally, Bryan Caplan's idea) was to cut the payroll (FICA) contributions from employers. In a short run with sticky wages, the money flows through to profits. My thinking is (a) this raises the demand for labor and (b) it provides profits to fuel business expansion. The latter point is based on the Minsky model, in which after a financial collapse firms are reluctant to engage in borrowing. My thinking is that in a capitalist system, profits are a signal to expand and losses are a signal to contract. The recession consists of too many sectors contracting and not enough sectors expanding. Restoring profits is the key to getting an expansion. I do not envision the cut in employer contributions going to workers until the economy gets closer to full employment and firms have to start to compete for labor more aggressively.
Rich countries are getting older and poor countries are full of young people. Rich countries have to keep taxes high and continue increasing taxes to support their population. At a point in time, young people in rich countries will start leaving for other countries. At the same time, the other tendency is rich countries try to attract more young people from elsewhere to balance their pyramid. 1. Culturally, where do you think the equilibrium will go? Will european countries become more anglophone or hispanic to attract the young ? 2. What should a developing country, competing against developed countries, do to avoid a brain drain in this scenario, ?
Countries don't make policies. Individuals and groups within countries jockey for power, and those in power make policies. The libertarian answer for what should be done is abolish social security systems and abolish border restrictions. Don't force young people to support old people. And don't force people to stay where they cannot achieve what is best for themselves.