The Case Against a Payroll Tax Cut
It’s rare for Republicans to find a tax cut they don’t support, but last week The New York Times reported on just such an exotic creature. Many leading Republicans, it seems, are extremely cool to the idea of extending the temporary cut in the Social Security tax that took effect on Jan. 1 and expires on Dec. 31. It has lowered employees’ share of the payroll tax to 4.2 percent, from 6.2 percent.
In theory, the payroll tax cut has positive economic effects on both the demand side and the supply side. By increasing workers’ cash flow, it should encourage additional spending in the economy – something that the economy desperately needs.
It also reduces the tax wedge between what it costs employers to hire a worker and the worker’s after-tax reward. Thus, a cut in the payroll tax should increase economic activity and reduce unemployment.
However, there is no evidence that the lower payroll tax has done much of anything to stimulate either spending or hiring. There are a number of reasons for this.
First, the tax cut only helps those with jobs. While many have low wages and undoubtedly are spending all their additional cash flow, those with the greatest need and most likely to spend any additional income are the unemployed.
Second, the payroll tax cut helps many workers who have no need for it and will only pocket the tax savings.
Third, economic theory and the experience with tax rebates in 2001 and 2008 tell us that people are strongly inclined to save temporary increases in income. People only increase their spending when they perceive an increase in their permanent income.HT: Real Time Economics
Fourth, even if one assumes that the cost of employment has declined and employers can somehow capture some of the payroll tax cut, there’s little sign that labor costs are the principal factor holding back hiring....MORE
Just as a payroll tax cut "only helps those with jobs" a cut in the top marginal rate "only helps those above that income threshhold".
"Second, the payroll tax cut helps many workers who have no need for it and will only pocket the tax savings." really needs no comment.
For "Third, economic theory and the experience with tax rebates in 2001 and 2008 tell us that people are strongly inclined to save temporary increases in income." look at the cash hoards being accumulated by any company that is profitable, including privately held corporations.
Finally "Fourth, even if one assumes that the cost of employment has declined and employers can somehow capture some of the payroll tax cut, there’s little sign that labor costs are the principal factor holding back hiring" seems pretty damning to any corporate tax cut/jobs arguement.
Wo where's the truth? Beats me.
