I am not sure what to say about this Dave Weigel piece. His thrust seems to be that the Democrats shouldn’t push for a tax increase because its basically fighting on Republican turf.
Well, okay . . .
But, its still a good idea. For one thing even if it did nothing to “stimulate” the economy it would bring relief to working people in one the hardest economic times in recent memory. That’s a good unto itself.
However, even more than that its hard to see how you lose with a payroll tax cut. If people spend the cut it boosts Aggregate Demand and helps relieve unemployment. If people save the payroll tax cut, they will increase the rate at which repair household balance sheets and get out of the recession.
Moreover, unlike regular citizens the government can borrow at a profit!
If the government give you a tax cut today, pays for it with 5 year bonds, and then taxes you to pay back the bonds in five year you will be better off. Why?
Because the interest on the bonds will not cover the inflation between now and the time you have your taxes raised.
Indeed, the government should use this opportunity to completely cut the payroll tax to zero and allow households to repair themselves again at a profit!
I would also suggest cutting the tax rate on business because I believe that will not only spur demand but lower payroll constraints for lots of firms. However, even if only the rate on workers was cut that would be a great positive for the economy.
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Saturday ~ August 27th, 2011 at 2:18 am
Khal Mojo (@KhalMojo)
I’m pretty sure Weigel was making a purely political argument where if the Democrats go this route, nagging the Republicans for trying to raise taxes on the middle class, that the Republicans can just… agree to not raise them and take away the Democratic Party’s new tease toy.
Saturday ~ August 27th, 2011 at 1:25 pm
Eric L
I really don’t see how lowering business taxes can affect payroll constraints given that revenue spent on payroll is not taxable income. Your expected marginal profit from an employee is (1 – tax rate)(expected marginal revenue – wage), and it isn’t possible for the tax rate to change the sign of this and affect whether you’re hiring or doing layoffs. The one exception is if the expected revenue comes in the future and you expect the tax rate to change. But in this case it’s better to have a temporary tax hike on business profits; a temporary tax cut gives them reason to delay hiring to have more profit now when it will be taxed less.
I’d also add if this were a good way to spur demand, then given record profits we ought to be doing fine on demand.
Saturday ~ August 27th, 2011 at 1:38 pm
Johnnie Linn
The government will not be better off from its own inflation because prices will anticipate the inflation and the government will have to pay more for the goods, services, and resources that it buys.
Saturday ~ August 27th, 2011 at 8:35 pm
Eric L
Nonsense. By that logic inflation should rarely happen because the markets expect inflation.
Sunday ~ August 28th, 2011 at 12:57 am
Johnnie Linn
Eric:
“Anticipate” and “expect” are not the same thing. “Anticipate” is to predict that a thing will happen and take action to protect yourself or to take advantage of that thing. Look at correlation between growth of the money supply and increase in prices. Predict the growth of the money supply. Make appropriate changes.
Sunday ~ August 28th, 2011 at 12:44 pm
Eric L
Your argument rests on inflation not happening — that it will not cost more to fix the roads tomorrow because the market will anticipate the inflation and raise prices today. Yet inflation normally does happen. Is this because the market does not usually anticipate it?
Sunday ~ August 28th, 2011 at 4:33 pm
Johnnie Linn
My argument rests on inflation happening. The roads will cost more to fix because prices will have gone up, anticipating inflation that will arise from the increase in the money supply.
Monday ~ August 29th, 2011 at 12:08 am
Eric L
Karl Smith isn’t arguing for printing money, he’s arguing for selling treasury bonds. The market plainly wants more of them right now.
Monday ~ August 29th, 2011 at 10:00 am
Johnnie Linn
So where is the inflation that the government will need to profit on the bonds going to come from?
Thursday ~ September 1st, 2011 at 2:46 am
Eric L
Same place it normally comes from.
Thursday ~ September 1st, 2011 at 1:44 pm
Johnnie Linn
Money.
Tuesday ~ August 30th, 2011 at 5:32 pm
James Wynn
“Moreover, unlike regular citizens the government can borrow at a profit! If the government give you a tax cut today, pays for it with 5 year bonds, and then taxes you to pay back the bonds in five year you will be better off. Because the interest on the bonds will not cover the inflation between now and the time you have your taxes raised.”
That’s profitable for the government (if one sees “government” as discreet entity that seeks to constantly improve its own interests). But it’s not so profitable for the citizens who will receive a small tax break now and then see it more than gobbled up by inflation in the near term.
Thursday ~ September 1st, 2011 at 2:49 am
Eric L
I’m puzzled as to how exactly you think inflation works. Can you put what you are suggesting into a mathematical form?