David Leonhardt makes the case for targeted payroll tax cuts
In my column Wednesday morning, I argued for a similar approach for a new payroll-tax cut for businesses. Rather than giving a tax cut to all businesses, as the White House seems to be mulling (though the details are unclear), a targeted tax cut would reward only those business that added to their payroll. This approach does less to increase the deficit and yet could do more to promote hiring.
I have to take a fairly strong stand against this type of thinking. While targeting sounds very savvy I think in practice it’s a bad idea. One its just hard to pull off neatly. We are driving a freight train here not a Maserati. No dicing through the orange cones.
Moreover, the point of the stimulus isn’t simply to pull hiring forward, though that’s not a bad outcome. It is to lesson the constraints on business and to get cash flowing in the economy.
Right now the government can borrow money at less than the rate of inflation. That means free in real terms. It can give that money to business who may or may not be cash strapped. If they are then this opens up new opportunities for them in a dramatic way.
If the businesses are not cash strapped then in the absolute worse case they simply hoard the cash and its no harm, no foul. Remember we are paying less than the rate of inflation to borrow. Perhaps, however, they will find a useful investment for it, which means the total return in the economy goes up.
The government borrows money for free, gives it to businesses who then invest it with some positive rate of return. That’s good.
Lastly, it also lowers the cost of labor. That’s good because it mimics painful wage declines that would be needed to clear the labor market. Rather than waiting for slow moving inflation to drive down real wage rates, we can drive them down right now with a business side payroll tax cut.
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Wednesday ~ June 15th, 2011 at 2:51 pm
foosion
>>If the businesses are not cash strapped then in the absolute worse case they simply hoard the cash and its no harm, no foul.>>
The government will have to pay back its borrowings. It’s not free money.
We’d be transferring wealth from taxpayers to businesses who are not doing anything useful with it. That doesn’t seem very good from an efficiency or distributional equity point of view.
Wednesday ~ June 15th, 2011 at 3:28 pm
Russell Grote (@Russell_Grote)
Do you favor targeted payroll tax cut if bond rates are higher than inflation? Free money seems to be the crux. It seems supply side spending should be secondary when real wages are not the cause of unemployment. Why not borrow to implement more demand-side stimulus if the money is free? Who cares if the multiplier is low? It would be the same as businesses sitting on cash.
Thursday ~ June 16th, 2011 at 1:04 pm
buddyglass
I’ve always wondered whether a simple labor subsidy could work. Cutting the payroll tax is sort of a labor subsidy since it lowers the cost of retaining employees, but the way in which it’s applied tends to mitigate the impact on low-paying jobs. Yes, the payroll tax is regressive given the cap so cutting it is progressive, but how much more progressive would it be to simply offer a $N/hour subsidy for all hours worked (under 40/week)?
Our goal isn’t to increase the total amount paid out to employees; it’s to increase the total number of people employed. So why subsidize on a per-income basis?
Subsidizing per-hour would more directly address the fact that the highest levels of unemployment are among the least educated, who represent the group most likely to occupy low-paying jobs. So a flat per-hour subsidy would disproportionately benefit this group. It would make it a tiny bit cheaper to hire a software engineer, but a whole lot (relatively speaking) cheaper to hire someone to pick fruit, assemble parts, etc.
I’ll go a step further and suggest that a national, flat, per-hour labor subsidy might represent a more efficient method of improving the lot of the “working poor” (as opposed to offering state-managed means-tested services). Just put more money in their pockets and let them spend it on whatever their needs are.
Moreover, if the subsidy were paid out only based on hours worked by legal residents then it would significantly damage the profit motivation to employ illegal labor.
You’d want to ditch the minimum wage at the same time. Tune tune the subsidy amount such that the “effective” minimum wage of the lowest earners ends up where you want it to be.
Sunday ~ June 19th, 2011 at 2:08 am
Joe Eagar
The author is right. Economic stimulus under a trade deficit is different than economic stimulus under a surplus. The goal should be to lower unit labor costs (which FYI doesn’t necessarily mean depressing wages, as companies are perfectly capable of surviving on less profits if the personal savings rate is higher–i.e. shifting the composition of national savings away from corporate saving and toward personal saving).
Happily, the most politically obvious stimulus is to cut business payroll taxes, which fits the supply-side narrative very well. In the perfect world of theory, this should be paid for with a VAT (shifting resources from consumption to exports). Paul Ryan’s VAT plan could be tweaked, so that instead of replacing the corporate income tax with a VAT, we could replace the payroll tax with one. That would help the trade situation, too.