I largely agree with Betsey’s analysis except for this part here

The centerpiece is a series of sharp payroll tax cuts. The usual problem with payroll taxes is that they largely subsidize existing workers. But this plan — three separate payroll tax cuts — is different.

The first tax cut is the most innovative: No payroll taxes at all for firms increasing their wage bill. In economics, all the action is at the margin. If we want people to do more at the margin — hire more people — then the incentives to do so should be targeted at the margin. We will get much more bang-for-our-buck by giving the biggest tax breaks to the hiring of extra workers.

What is the point of getting more bang for our buck? Real interests rates are below zero. Any positive bang passes the cost benefit test.

In essence the US government can arbitrage out market frictions. Firms may not be able to borrow a zero cost but the US government can borrow at zero cost give them the money and then tax them back later at a lower rate. Lower both because the real return cost of government borrowing is negative and because the economy is likely to grow between now and then.

So why not just cut everyone’s payroll tax down to zero. Its really big. Its really simple. No one has to worry about what qualifies as a “new worker.” No one has to worry about people trying to play worker switch-a-roo.

Not too mention there is likely to be some bang simply by lowering payroll costs. There are some firms for which cash-flow is simply no issue whatsoever, but for most firms its at least some concern.

Lets just remove the concern all together, cut the payroll tax to zero!

Also, as I always mention, the sheer absurdity of a zero payroll tax continuing indefinitely makes it easier to allow it to expire when the economy recovers.

Advertisements