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.