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.
Feel free to put new questions in the comments.
READER COMMENTS
Alex J.
Jun 16 2009 at 10:50am
What are the chances that the government will default on TIPS? Possibly they might not fully match their payout to the growth of the price level. The government could then pay back other bonds with inflated dollars.
The spread for TIPS should take into account both inflation expectations and default expectation.
Alex J.
Jun 16 2009 at 10:51am
Sorry for spooking those people who bought TIPS with a second mortgage.
Kurbla
Jun 16 2009 at 2:15pm
“Countries don’t make policies. Individuals and groups within countries jockey for power, and those in power make policies. “
The problem is with groups. Logical consequence is that individuals and subgroups withing groups jockey for power, and those in power make policies etc.
Open borders are certainly one solution for low natality in rich countries. But: theoretically weak one, because it depends on existence of poor countries!
Jeremy, Alabama
Jun 17 2009 at 8:13am
As you say, tax rebates, being short term, are most likely to be either saved, or used to reduce debt, or spent on imports. Rebates are a horrible way to reduce taxes, because they can not change earning behavior, only spending behavior.
A FICA holiday is a better idea – but again, being short term, the savings are likely to flow into profits without fooling businessmen into hiring. Hiring is a long-term phenomenon, and a short-term tax gimmick will not cause it.
Paul Ralley
Jun 17 2009 at 9:31am
What will the world look like assuming poor regions have income convergence with rich countries. I.e. PPP income in 2009 dollars globally is (say) $40,000 in 2050. (lets call this best case!), and there are lower levels of inequality. (lets add low trade barriers too)
We will all be very productive, but many things that are cheap will be much more expensive – is it as simple as the basket of goods and services we enjoy will switch away from labor intensive items? Or could the above only happen from technology, leaving many things unimaginably cheaper?
The White Detroiter
Jun 19 2009 at 11:46am
Opening borders destroys libertarianism. California used to be much more free before the 1965 Immigration Reform Act created a tidal wave of immigration. Now it’s among the most heavilly taxed and overegulated states in the union.
Immigrants themselves (especially Mexicans) tend to be low-skilled and thus earn low incomes, pay little in taxes and use government benefits at high levels. See the work of George Borjas or Robert Rector on this.
You are probably familiar with how the shrinking ratio of workers to retirees makes Social Security and Medicare more difficult to afford. Well there is an equivalent ratio of whites to non-whites that affects how burdensome racial preference laws are. Non-white immigration to America automatically reduces the ratio of whites to non-whites. Now you could say “just get rid of racial preferences!”. Sounds good to me but it hasn’t happened yet and it will likely get harder to do as racial minorities increase as a percentage of total voters. Brazil used to have little in the way of racial quotas but as the non-white share of the population increased over time, political support for equal treatment under the law diminished and quotas were introducted this decade. Let’s face the facts: Free markets and classic liberalism derive their support overwhelmingly from native-born whites. Watch the Libertarian Party Conventions or Cato Institute conferences on C-SPAN if you doubt this.
Immigration into Europe is also causing loss of liberty. The Muslim newcomers are driving crime rates through the roof and are insisting on Sharia law and special treatment. The ruling governments are passing oppressive free speech restrictions to stop criticism of Islam.
Finally, I disagree with the idea that we need more young people or that we “need to grow”. See the following Robert Locke article for an excellent take on this.
http://www.vdare.com/locke/grow.htm
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