Feb 7th, 2009 at 4:13 pm
Payroll Tax Cuts as Stimulus
It seems that J.M. Keynes himself thought this was a good idea. And, indeed, it strikes me as indefensible that a stimulus package featuring hundreds of billions of dollars of tax cuts doesn’t include any FICA provisions. Payroll tax cuts wouldn’t be my first choice of stimulus measures, but there’s a strong case for including some tax-side measures in the package and they’d probably be my first choice of tax cuts to include. But the key conceit shared by right and center in the congress seems to be that it’s crucial to avoid spending any stimulus money on helping people in financial need, so this is what you get.
52 Responses to “Payroll Tax Cuts as Stimulus”
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February 7th, 2009 at 4:24 pm
re: But the key conceit shared by right and center in the congress seems to be that it’s crucial to avoid spending any stimulus money on helping people in financial need, so this is what you get.
A FICA tax cut is not going to help anyone who is unemployed (neither will other tax cuts of course).
By the way, it may be true that the Right wishes to avoid helping people in need, the major provisions intended to help the unemployed (expanded eligibility, partial government funding of COBRA payments; Medicaid for the unemployed not eligible for COBRA) have been left untouched, or at least no one is reporting that these were stripped from the bill.
February 7th, 2009 at 4:28 pm
I think the 500/1000 tax cut is structured as a payroll tax reduction, isn’t it? And the fact that it is fully refundable makes it targeted at the folks you are calling our attention to. Unless there was a way to index the payroll tax for low income folks, wouldn’t this be the equivalent of simply increasing the size of the standard Obama tax cuts? How would what you are thinking about be different than just increasing the size of the Obama tax cut?
February 7th, 2009 at 4:35 pm
Another problem: as presently constituted, the payroll tax is the only means of financing Social Security. And one hardly has to believe that Social Security is in imminent crisis to understand that it needs its revenue, and probably a bit more, to keep up promised payments starting in the 2040s. The EITC can be seen as a de facto payroll tax cut financed with general revenues; I think that’s the way to go.
February 7th, 2009 at 4:35 pm
Well, in addition to reducing taxes on anyone who actually pays taxes (as opposed to the fudge of only income taxes), payroll taxes are also a defacto tax on employment.
February 7th, 2009 at 4:39 pm
jonf, a payroll tax holiday is tremendously stimulative: it puts extra money in the pockets of those who are employed and it makes a new hire cheaper for anyone considering same as well as overall improving business cash flow in a way that could allow for jobs to be saved, meaning higher household income than otherwsie would be the case, leading to more spending.
it’s not as stimulative as direct infrastructure investment, but it’s pretty good as a device.
the other tax one i like is a state sales tax holiday for a year funded by the feds, whose “benefits” kick in for households only when they spend, thereby improving incentives in that direction.
a payroll tax holiday benefits people somewhere up to the 90th household income percentile or so pretty reasonably, so it’s not that it’s not thought of only because it would help those lesser off.
February 7th, 2009 at 4:49 pm
You know that temporary payroll tax cuts are the sort of thing sensible Republican economists push for as their preferred fiscal stimulus? For instance Bils and Klenow, as widely known via Mankiw.
February 7th, 2009 at 5:28 pm
David in Nashville- payroll taxes go into the general fund the same way everything does. There is no lockbox. It’s been a shell game since 1968.
February 7th, 2009 at 5:31 pm
I can’t believe liberals like me spent the entire Bush Era bitching about how rich people got all these tax cuts while the poor people didn’t get any cuts.
Tax cuts are great. Period. Putting more money into the hands of people makes them spend it, even putting money in the bank equates to spending the money, or paying your bills.
Consumption (you know that thing that makes up 70% of the economy) is dead right now and it has a lot to do with people not having extra money on hand.
The problem with the tax cuts of the Republican kind is that they inevitably go to rich people.
If Democrats wanted to score huge economic points, they could give money back to middle and lower class americans. I don’t see why there is a disconnect between this idea and Democrat ideology. It is helping the people who are supposed to be their constituency.
So, being the middle class liberal Democrat hippie that I am….
I want a tax rebate (not a deduction, or a credit that kicks in when I file next year) and I would love for it to come in the form of lower income taxes…wether its FICA or whatever I will leave to the experts.
Last year’s rebate yielded 2 quarters of goodness on the GDP numbers…and it’s pretty apparent that it helped. And that was just a measly $600 per person. Imagine we tripled that?
February 7th, 2009 at 5:44 pm
Perhaps Matt because you have been on vacation you did not hear that the Republicans have been calling for a FICA holiday and it has been resisted by Dems and “Centrists” largely because it worsens the Social Security shortfall down the line.
On professed ideology alone Republicans prefer this method of “giving” money to lower income workers because it returns money which the poor actually paid to the government.
And I suspect that many Republicans welcome the fact that it does worsen projected SS deficits.
February 7th, 2009 at 5:48 pm
Brain.
Your right in reality, but JT is also right, everyone pretends that the lock box is real, so Republicans who are clamoring for a payroll tax holiday will also then turn around and claim SS is going broke because the trust fund is underfunded.
Some of them may be arguing in good faith about the stimulative effects of a payroll tax cut, but a lot of them are also making a stealth attack on SS.
February 7th, 2009 at 6:20 pm
Re: jonf, a payroll tax holiday is tremendously stimulative
I don’t doubt that, and I support the idea. My post simply stated that a payroll tax cut does not put money in the pocket of an unemployed person, which is true.
February 7th, 2009 at 6:34 pm
Payroll tax holiday is probably the only stimulus of the necessary size and immediacy to help any more.
Look for it to be enacted sometime in May-June-July, when the economic situation is about 2.5 million jobs worse than now.
I’ve been talking about a payroll tax holiday for months now. Glad to see this is finally starting to get some traction.
The hilarity of the republican position is they think the U.S. government can go broke.
February 7th, 2009 at 7:02 pm
From the Center on Budget Policies and Priorities (CBPP):
PAYROLL TAX HOLIDAY A POOR STIMULUS IDEA
The exercise in their report supposes a 2 month payroll tax holiday costing 120B. Last night on Larry King, Steve Forbes suggested halving the payroll tax for two-years. Using the dollar estimates from the CBPP that would be $720 billion.
Forbes idea would basically absorb the entire stimulus bill and provide the most direct assistance to those with 100K jobs. No infrastructure. No aid to states. No pell grants. No increase in the safety net.
February 7th, 2009 at 8:18 pm
JonF,
“A FICA tax cut is not going to help anyone who is unemployed”
It’s been a while since I was on unemployment but I’m almost certain you need to pay FICA on your unemployment insurance income.
February 7th, 2009 at 8:44 pm
Hey Matt, what happened to the post about the paradox of thrift? It seems to have vanished from the site. Anyway, I liked that graph of job losses you posted with it. Something mildly interesting and worth pointing out: the current recession looks a lot like the previous 2 for the first 9 months. It’s after the 9th or 10th month that the 3 lines start to really diverge. What happened 10 months into this recession? The banking collapse. Paulson & Bernanke let Lehman fail. And that’s when an ordinary recession became an extraordinarily bad recession, or perhaps a depression.
February 7th, 2009 at 9:05 pm
If you want to spend “money on helping people in financial need”, that’s fine. But be honest enough not to call it “stimulus”.
You don’t stimulate the economy by putting people on the dole. The problem of how best to help needy Americans now is completely separate from the problem of how best to get the economy to create jobs again.
February 7th, 2009 at 9:23 pm
If Democrats wanted to score huge economic points, they could give money back to middle and lower class americans.
You fail to understand the Democratic Party if you think like that. One of the pressing concerns of the current Democratic Congress is a “fix” for the AMT which would cost $90 billion and provide tax relief for people in the 100-250k bracket.
The irony is that the GOP, the party of the poor, supports tax cuts for the Democrats core constituency – the rich.
February 7th, 2009 at 9:27 pm
But the key conceit shared by right and center in the congress seems to be that it’s crucial to avoid spending any stimulus money on helping people in financial need
Yglesias is misinformed. The Senate Republicans suggested alternative to the current pork bill provides for a halving of payroll taxes for the poor.
February 7th, 2009 at 9:47 pm
http://corner.nationalreview.com/post/?q=Mzk3MTgyYzI3MWRkNmFiMDYwYzljM2QyNTBkM2JlYzc=
Oh Dear. Crawl away and hide, quick.
February 7th, 2009 at 10:11 pm
Real simple. People keep making the assumption that the bill is about stimulating the economy. It’s not. The main purpose is about greatly advancing the ideological goal of nationalizing the American economy. Until you abandon false assumptions it can’t, and won’t make sense to you.
February 7th, 2009 at 10:27 pm
Mickslam says: The hilarity of the republican position is they think the U.S. government can go broke.”
OK, I’ll bite on this lure. Do you maintain that it cannot go broke? Considering the unfunded entitlements coming due in decades ahead, and considering the ownership of the Federal debt by foreign interests, governments and others, it seems to me that US insolvency is a very real possibility, unless of course we cut out huge chunks of the government and pay only the entitlements and the interest on our debt. Or renege on the Social Security and Medicare benefits people are expecting to get?
February 7th, 2009 at 10:46 pm
If you don’t mind a right wing reactionary libertarian weighing in….
Cutting/eliminating payroll taxes has another benefit.It makes low wage labor more preferable to unemployment compensation.
Many people will take unemployment rather than “settle” for “low paying jobs outside their field” as the slightly increased income isn’t worth it.Susspending FICA incentivizes by offering more money for McJobs.
February 7th, 2009 at 11:00 pm
Re: It’s been a while since I was on unemployment but I’m almost certain you need to pay FICA on your unemployment insurance income.
No, you pay federal income tax. State income tax probably varies by state. But not FICA. That’s only levied on wage and salary (plus tips, bonuses and commsssions).
Re: If you want to spend “money on helping people in financial need”, that’s fine. But be honest enough not to call it “stimulus”.
It is stimulus: in fact it’s more likely to be spent than money spent in any other way.
Re: The problem of how best to help needy Americans now is completely separate from the problem of how best to get the economy to create jobs again.
Why do you think employers are laying people of? Because demand has fallen off sharply. To increase demand you must (first and foremost) increase income. Now, what effect does a transfer payment to individuals have? Duh!
February 7th, 2009 at 11:28 pm
The hilarity of the republican position is they think the U.S. government can go broke.
Yuk yuk! What sort of idiots would think such a thing? Everybody knows the US government has bottomless supplies of money. All they need to do is print some more, as they are doing at present!
February 7th, 2009 at 11:29 pm
Any cut in the payroll tax rate should be offset by an increase in the limit on taxable income, which is $106,800 this year (for Social Security–there’s no limit on Medicare payroll tax). Otherwise, you undermine Social Security and Medicare. Which is why the Republicans are proposing it.
February 7th, 2009 at 11:47 pm
Matt,
Why are you such a dick?
February 8th, 2009 at 12:15 am
I’m a boomer, and I’m old enough to recognize a camel’s nose under the tent.
All this talk about the wonderfullness of payroll taxes is just the first step in undermining Social Security.
The Social Security Trust fund is not in the desperate straits that Republicans want us to believe, but if we stop payments every time they sniff a downturn, it will be in trouble soon.
I’m not trying to minimize where we are right now, because I don’t think there is anything minimal about our situation, but I don’t think trying to screw up Social Security’s trust fund is a good response to the current situation. I personally think that a better approach would be to feed all talking heads (Davis Brooks et al) who push this meme to the nearest outraged mob.
MY mother’s home health aide took the bus to work everyday until she was eighty, when she was incapacitated by a stroke.
Her daughter is working the same hours, with the same dim chances for retirement. This isn’t right.
My grandfather (born in 1900) remembered the the mobs of the Great Depression. He had a job, but he worried about those who didn’t.
February 8th, 2009 at 12:24 am
Yes, a payroll tax holiday would be an effective, and quick-acting stimulus, as I’ve pointed out in recent comments here. Nice to see Matt jump on board.
As for you, DTM: as I’ve pointed out to you before, a payroll tax holiday would put a sizable chunk of money back in the pockets of median (~$40k) workers, about $3k this year. Yes, the relative handful of workers making $106k will get a bigger tax break than the median worker, because they pay more in payroll taxes. Not the end of the world. The combination of a payroll tax holiday with the existing EITC grants (which already more than offset payroll taxes) would be highly progressive in any case.
February 8th, 2009 at 12:27 am
Typo above. ” Wonderfulness of payroll taxes” should read ” wonderfullness of payroll tax cuts”. The point of payroll tax cuts isn’t to make payroll taxes less onerous. The point of payroll tax is to cut payroll taxes for the employer, which is part of the designD, SOCIAL sECURITYand if the employees end up with no benefits and no coverage in the next two t 52
February 8th, 2009 at 12:52 am
For what it’s worth, Mark Zandi’s report agrees with you. While all tax cuts seem to do poorly as stimulus in a recession, a payroll tax holiday would be the most effective of the bunch.
http://www.house.gov/smbiz/hearings/hearing-07-24-08-stimulus/Zandi.pdf#page=5
February 8th, 2009 at 8:17 am
Over at the ocrner they are criticizing your snark. You see if you would agree to lowiering the corporate income tax and having a smaller stimuls then they will gladly lower payroll taxes. Why we have to make the concessions is not explained. But apparently Republicans love payroll tax cuts enough to insist on them.
http://corner.nationalreview.com/post/?q=Mzk3MTgyYzI3MWRkNmFiMDYwYzljM2QyNTBkM2JlYzc=
February 8th, 2009 at 9:09 am
sab- There is no trust fund. The yearly SS surplus gets spent every single year, the same way every other tax dollar does. Fair enough to, as above commenters did, let your paranoia run wild over all the lies reich-wingers will tell to kill social security if they’re permitted a payroll tax holiday, but let’s not tell our own, shall we?
February 8th, 2009 at 11:39 am
Oh please. Can we finally lay to rest the fiction of a “social security trust fund”? The social security trust fund consists of a file cabinet in West Virginia of laser-printed IOUs from the government to itself. Seriously. You can go see it for yourself; they give tours. And according to the government, SS goes into the red in 2018, not 2040-whatever. The 204x fiction assumes that the government pays out the file cabinet of IOUs to itself. And given the government’s history of understating SS obligations, you should expect epic fail in 2015, not 2018.
Six years. Write it down.
February 9th, 2009 at 10:46 am
Payroll taxes (aka FICA) is the $$ that goes to fund Social Security and Medicare -
Is the GOP saying the want to take $$ OUT OF Social Security & Medicare?
Why would they want to do that? Isn’t SS & Medicare already UNDERFUNDED.
February 9th, 2009 at 4:42 pm
For the federal government to “go broke”, it would to refuse to cash it’s own checks. Solvency is never an issue for a soveriegn currency issuer.
February 10th, 2009 at 12:18 am
Is the GOP saying the want to take $$ OUT OF Social Security & Medicare?
There’s no money IN Social Security or Medicare. They are funded out of current tax receipts.
Why would they want to do that? Isn’t SS & Medicare already UNDERFUNDED.
The reason for cutting the payroll tax instead of the income tax is that most Americans pay little or no income tax in the first place. Cuts to the income tax would be attacked, as they always are, as “tax cuts for the rich”, since most of the money would go to (gasp!) the people who pay income tax. I.e., the rich.
Payroll tax payments, on the other hand, are more evenly spread across incomes, thanks to the cap on taxable income. Cuts to the payroll tax therefore benefit a wider range of Americans.
February 15th, 2009 at 8:48 am
Jorge,
Can you please define a rich person? Is it their balance sheet that makes them wealthy? Income statement? Consumption? It matters since you believe that income tax cuts go to those awful wealthy people.
When you get a moment, read up on the 5 million HENRYs that actually drive our economy (HENRY= High Earner Not Rich Yet) before you advocate policies that might kill this golden goose.
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