Arnold Kling  

A Strange Preference on Wage Subsidies

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Mark Thoma says that he signed a petition, which reads in part,


There are many ways to design an effective hiring tax credit, but in general the beneficial effects will be greater the stronger the hiring incentives and the lower the administrative burdens placed on firms. It is critical that such a tax credit be put into place quickly and that it is publicized widely. Firms will begin to accelerate hiring only when know they can count on such tax relief.

Cutting the employer portion of the payroll tax would do exactly what this petition wants. You could hardly ask for a lower administrative burden, a faster rollout, or a more direct wage subsidy. Yet my guess is that none of these economists would sign a petition calling for cutting the employer portion of the payroll tax. It really is the case of preferring the wage subsidy to take the form of a spending increase rather than a tax cut.


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COMMENTS (9 to date)
Lord writes:

There is a clear difference between a hiring subsidy and work subsidy since the former applies to expanded labor not total labor which can make it cheaper, larger in effect, and more targeted, but which is more difficult to establish and monitor.

Daniel Kuehn writes:

This is unfair, Arnold. Although there is some concern about how stimulative tax cuts are, I don't think anybody would make the case that they're an especially bad idea.

The concern is that a payroll tax cut doesn't target new hires the way this would. It's extremely challenging even to get an ostensibly "new hire tax credit" to target new hires. A payroll tax cut does even worse.

Ironman writes:

Arnold wrote:

"Yet my guess is that none of these economists would sign a petition calling for cutting the employer portion of the payroll tax."

Would the same economists sign a petition calling for a reduction in the federal minimum wage? Even if it could provide the same benefit for companies looking to hire the newest possible hires as the tax credit or the tax cut, but without affecting the budget deficit or the national debt?

Michael Bishop writes:

Arnold, if you want to oppose a targeted tax credit then please lay out your case more explicitly.

q writes:

why doesn't the huge decrease in tax receipts since the recession count as a tax decrease?

Bill writes:

Arnold, if you want to oppose a targeted tax credit then please lay out your case more explicitly.

Yeah, Arnold, hurry up! There's a lot of dead wood around my office I want to clear out so I can re-hire in a month with a tax credit.

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." — FAH

Justin Dailey writes:

Reducing FICA in order to create jobs doesn't seem consistent with the recalculation hypothesis. If recalculation is correct, unemployment isn't high because workers refuse to accept nominal wage cuts or because unemployed workers have too high of a reservation wage, it's because millions of jobs in various sectors are gone for good, and the economy is still figuring out how best to employ all of those workers. I think you've made a convincing case that at least some of the increase in unemployment is due to recalculation.

If labor costs are an important reason for the increase in unemployment, however, I think we shouldn't argue in favor of a tax cut which puts the deficit around $2 trillion this year (assuming we cut the entire employer portion). We should support Scott Sumner in calling for reflation and NGDP targeting. If NGDP targeting as even half as effective as Scott Sumner suggests, it would do a lot to get rid of support for ad-hoc fiscal stimuli everytime the business cycle turns down.

That all said, I agree reducing the cost of employment and leaving more funds in the private sector would be positive for employment at the margin even if recalculation is correct, but as mentioned in other comments the cut isn't targeted, and nearly all of the tax cut goes towards continuing to employ workers who would have been employed otherwise. As Bill reminds us however, even a targeted approach could be gamed.

If the primary goalis to shrink government and reduce deadweight loss, then it's not a bad plan at all, but I doubt it's going to light a fire in the labor market. Also what happens after the payroll tax holiday, or is it a permanent policy shift?

One more point, more so than simply opposing a tax cut because it is a tax cut, liberals are probably against anything which brings the Social Security insolvency date forward.

Reducing the FICA tax on the employer reduces the costs of employment. The employer writes the check, but the employee pays that tax out of his production. It is actually a tax cut to the employee. It has some value being administratively simple. At the margin, an employee can keep his job at his current salary, rather than have a pay cut.

There IS a recalculation, along with the Obama administration issuing threats of future business control and higher taxes, while sucking up capital through government borrowing.

Businesses can't plan and don't want to take risks in the face of huge uncertainty. The employment picture won't change until businesses can see a guarantee of predictible and limited government borrowing and lower overall taxes. It isn't going to happen under Obama.

Right now, we are seeing a recalculation to adapt to a more socialist control of business, more costly regulation, and higher energy costs. The economy will not employ as many people as it did before, if this adaptation to big, intrusive, and costly government continues.

Waiting for the jobs
Quip: Obama is building a new society. I'll wait until he is done.

Small business owners are standing by the fence and watching, paralyzed by regulatory uncertainty. They aren’t hiring precisely because of government intervention in the economy. So-called stimulus, and temporary or limited tax breaks won't change that.

George N. Wells, CPIM writes:

Why hasn't anyone observed that elimination of the employer portion of the FICA preimum will deplete the Social Security Trust Fund (SSTF)? While I am sure that a lot of businesses will cheer, the fact is that, once eliminated, it will be impossible to reinstall and the SSTF will starve faster.

I have to wonder just who thinks that this is a good idea? Consider me a conspiracy theorist but this seems to be an answer looking for a problem.

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