Payroll Tax Cut Probably Wouldn't Lead to Much Job Creation

[donsutherland1]

In today's edition of The Wall Street Journal Michael Boskin, formerly head of the Council of Economic Advisers under President George H.W. Bush, argues that a payroll tax cut would stimulate job creation. He writes, "It would be far better to junk part of the remaining stimulus in favor of a one-year partial payroll tax cut."

To be sure, the fiscal stimulus has many flaws. However, its weakest link is the tax relief. Rather than boosting consumption, consumers largely saved the proceeds from reduced taxes. In addition, a jobs-related tax credit did little to encourage hiring. A payroll tax cut would meet a similar fate, doing little to increase hiring, improving bottom lines only, and leaving only a larger accumulated federal debt in its wake.

2009 is not 1981. Businesses are not failing to hire people because the costs of labor are cost prohibitive on account of rising inflation. Inflation has been quiescent. Instead, businesses are not hiring people on a sufficient scale to reduce the unemployment rate, because their is insufficient demand to justify such hiring. Even as the economy has resumed growth, substantial sectors in the economy remain under pressure. This morning's reported decline in homebuilding, anemic growth in industrial production reported yesterday, and Monday's reported drop in manufacturing in the New York region illustrated continuing weaknesses. Larger forces of consumer deleveraging are continuing.

In 1981, a supply-side remedy was a fitting tool for the high inflation-high unemployment environment that existed at that time. Today, the nation is emerging from a demand shock that resulted from the collapse in an earlier housing bubble and the damage that bubble's collapse inflicted on overleveraged financial institutions and households. Supply-side remedies would not address the reality of low demand. The experience concerning the fiscal stimulus package's tax incentives provide a case in point.

In the end, job creation will depend on a restoration of demand. That will take time. If the nation is truly committed to fiscal consolidation following the recession, a good place to start would be to avoid politically-popular but economically-questionable measures that would do little to create jobs and leave only increased debt in their wake.

Finally, there is little assurance that a "temporary" payroll tax reduction would not become permanent. Once a constituency develops, pressure could be applied to extend it. The increasing clamor among some of the financial pundits for renewing the 2001 and 2003 temporary tax cuts highlights that possibility. Consistent waiving of modest Medicare savings via the "doctor's fix"--temporarily stalled, but far from dead--offers another example. The end result would be that a temporary program would become permanent (de facto or de jure). As a result, it would enlarge the nation's structural budget deficit.

 

[Kushinator]

This has been my sentiment from the beginning of the stimulus debate. It is not as if the stimulus was totally inadequate, the single largest portion was tax incentives and not infrastructure (whether it was for commerce, education, health care, etc...) where new incomes would have generated spending along with a multiplier effect.

In future situations, i believe policy makers and economists will be cautious of any future tax based stimulus unless stagflationary scenarios emerge. Now there is even serious talk of another stimulus. The sad thing is that it will probably not get the proper GOP votes without tax cuts (which seems utterly foolish IMHO).

 

[Gardener]

I would certainly welcome a payroll tax cut right about now.

Just paying the D@mned thing requires such jumping through hoops, that Rube Goldberg must have designed the system for paying it.

 

[obvious Child]

This has been my sentiment from the beginning of the stimulus debate. It is not as if the stimulus was totally inadequate

In a way it is. Around 22% has been spent. Stimulus to work needs to be timely. Seriously. It's November and less than a quarter has been spent. That's pretty much inadequate in terms of timing. In terms of stimulus, I'd say it has largely failed, but when you look at the actual amounts, it's not really stimulus anyways. Hence why I've argued before let's stop pretending it's stimulus and recognize it for what it really is: long term infrastructure investment.

Now there is even serious talk of another stimulus. The sad thing is that it will probably not get the proper GOP votes without tax cuts (which seems utterly foolish IMHO).

It appears neither the GOP nor the Dems (and their brainless supporters here) have any real clue.

 

[Kushinator]

In a way it is. Around 22% has been spent. Stimulus to work needs to be timely. Seriously. It's November and less than a quarter has been spent. That's pretty much inadequate in terms of timing. In terms of stimulus, I'd say it has largely failed, but when you look at the actual amounts, it's not really stimulus anyways. Hence why I've argued before let's stop pretending it's stimulus and recognize it for what it really is: long term infrastructure investment.

When i was referring to inadequacy, it was pertaining to the size and not the time laggard involved. (When a female claims a man is inadequate, 99 out of 100 times it is due to size; not how long it takes him to finish :mrgreen: ) Under the guise of fiscal stimulus, the notion is that governments are going to have to go to the sovereign debt market and raise the necessary funding to begin (in our case continue) massive spending.

It appears neither the GOP nor the Dems (and their brainless supporters here) have any real clue.

The Dems want these packages to be permanent :2razz:

 

[Mach]

To the OP, I think that's spot on. That summarizes my current behavior.

In a way it is. Around 22% has been spent. Stimulus to work needs to be timely. Seriously. It's November and less than a quarter has been spent. That's pretty much inadequate in terms of timing. In terms of stimulus, I'd say it has largely failed,

I am under the impression federal stimulus was not actually intended to mechanically change the economy, they were intended to show the government will back up the economy in the crisis, and push people to remain calm and focused on growth, instead of liquidating and going into a fallout shelter. It had to be substantial to prove the point, but if it was actually used becomes less relevant. Basically it's like a reverse threat...

In that respect, I think it could have had the intended effect.

 

[phattonez]

A temporary tax cut would only cause a blip on economic indicators. Any temporary job creation would probably be offset by the confusion caused by this tax change.

 

[obvious Child]

When i was referring to inadequacy, it was pertaining to the size and not the time laggard involved.

I understood that, but it was still quite inadequate.

The Dems want these packages to be permanent :2razz:

I'm not sure what is worse: irresponsible, irrational anti-tax stances, or irresponsible, irrational spending stances.

 

[obvious Child]

I am under the impression federal stimulus was not actually intended to mechanically change the economy, they were intended to show the government will back up the economy in the crisis, and push people to remain calm and focused on growth, instead of liquidating and going into a fallout shelter. It had to be substantial to prove the point, but if it was actually used becomes less relevant. Basically it's like a reverse threat.

I thought the whole point was to boost jobs quickly. Which it has failed. And most people liquidate because they have no choice, not because their fear the government won't step in.