Monday, December 19, 2011

Tax Cut Extensions

The House GOP is right (and both Senate parties wrong) on the economics of the payroll tax cut. Whether one believes that tax cuts help spur economic activity by increasing Aggregate Demand or by increasing incentives to productivity, a two-month measure is basically worthless. People, especially business owners in this case, don't make long-term employment decisions based on a few dollars difference for 2 months.

Of course, one can qualify the statement on rightness here: temporary tax cuts are a dumb idea in general. Do we want people hired for short stints or for the long term?

6 comments:

Anonymous said...

what might actually work is the following:

We drop the payroll tax paid by employers (perhaps to 0), for all new workers hired in the next X months, for the next Y years. For instance, any employer who hires new people from now until March won't pay payroll taxes on those employees until January 2017.

(we'd have a lot of conditions, for instance they can't lay off people in order to qualify).

Chops said...

It's a good idea. In order to avoid the layoff-and-hire-somebody-else, we could make it so that it only counts for net increases in overall payroll.

Here's the thing: if it's a good idea to do this in the short run, why isn't it a good idea to do it in the long run? And what we run up against is a massive, persistent budget deficit that most assuredly will not go away at the end of the recession.

I think we'll start having intelligent policy debates again once the deficit is manageable, and not before. This is as it should be.

Anonymous said...

It looses its stimulating effect if employers know it will last indefinitely. Imagine there's an employers who's on the edge of hiring a new employee, but he wants to wait until there are 2 consecutive good quarters before he does so. If most marginal employers are like this, then they all won't hire, which prevents economic growth, which prevents the two consecutive good quarters.

Now, theres a million reasons it might not work, but if we're going to try Keyensian stimuli, I'd prefer my idea to "shovel ready projects."

One last thing, if we've totally misjudged the economy, and nobody hires even with the tax incentive, then the dollar amount of the stimulus is much smaller than we anticipated.

Chops said...

Anonymous, you've got it backward. A widely accepted principal of government spending/taxation is that the more temporary the change, the less likely it is to have any stimulative effect.

Peter F said...

It has always seemed stupid to me, during a period of high unemployment, to give money to the people who have jobs through a payroll tax deduction. For every 10 people working, one is unemployed. At $1000 tax break per person, you could use that money to give $30,000 jobs to one out of 3 unemployed people. Those people would then do some productive work -- maybe investing in energy conservation projects. That seems a lot smarter than giving money to those with jobs, who won't do any more productive work, and hoping that their spending will spur the economy. Especially considering the large magnitude of consumer spending that quickly leaves the economy by way of imported gasoline, imported cars, imported clothes, imported electronics, etc.

Katrina said...

Agreed.