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The Spectacle Blog

Contra-Bartlett, Pro-Payroll Tax Cut

By Joseph Lawler on 8.30.11 @ 11:59AM

Bruce Bartlett, the budget analyst known recently for criticizing the conservative movement he once embraced, has come out against a payroll tax cut. Right now, Republicans oppose the extension of President Obama's payroll tax cut, in what is taken by most of Bartlett's center-left peers as the ultimate act of cynicism. So it's interesting to see Bartlett side with the Republicans, who favor permanent tax reform over short-term measures like the payroll tax cut.

Bartlett cites a number of both Republican and liberal claims in opposing the payroll tax reduction, including that it's only a short-term measure, that people will save the rebate instead of spending it and thereby boosting the economy, and that it will endanger the perceived link between payroll taxes and Social Security benefits, thereby weakening Social Security's viability (to make this last point, he cites the work of liberal economists Peter Orzsag [Obama's former budget director] and Joe Stiglitz, who argued that Social Security is a forced savings program, not a tax, and is effectively perceived as such by workers).

Unfortunately, I'm going to have to come down against Bartlett on the economic benefits of the payroll tax cut extension. Although a permanent tax reduction through broad-based tax reform would be more desirable, in the short term a payroll tax cut, enacted on the employer's side of the balance sheet, would help the economy in two ways. First, it would put money in the pockets of the most liquidity-constrained workers. The payroll tax falls heaviest on low-income workers, many of whom, Republicans are increasingly fond of reminding us, pay little or no income tax -- meaning that income tax cuts won't help them. And while it may be true that the recipients of the payroll tax rebates will save the funds instead of spending them, it's not clear to me why exactly it's so much more desirable to have people spend money rather than pay down their debts. The sooner households can crawl their way out of indebtness, the sooner consumer spending will rise.

Lowering the amount of payroll taxes companies must pay for each worker quite simply makes it cheaper for them to hire. It may only be a small incentive but it certainly won't hurt employment.

As for the claim that cutting the payroll tax will be perceived by workers as also cutting their future Social Security benefits: that means that workers would be drawing future consumption into the present. The payroll tax is the tax that falls heaviest on liquidity-constrained workers -- exactly the folks who don't have other means of smoothing out their consumption over time. Giving them the option of spending their Social Security "savings" now can't hurt.

View all comments (11) | Leave a comment

Teflon93| 8.30.11 @ 12:37PM

Payroll tax cut or no payroll tax cut, businesses will not hire somebody now they figure they may have to fire shortly because of the impact of ObamaCare, tax increases, regulatory burden increases, inflation, and interest rate hikes. No payroll tax cut will be significant enough to offset these other costs, which is why businesses aren't hiring. It's a gimmick, plain and simple.

LC Jack| 8.30.11 @ 4:14PM

Right on- Businesses while many are cash-flush are not expanding infrastructure or enacting large hiring projects. New locations/stores/offices, etc. are NOT being scheduled and hiring is limited to critical replacements. Mid-level management is getting screwed as there are very limited chances to move up with construction being put on hold. In short, from what I see, business IS hunkering down and keeping lots of cash in hand.

Teflon93| 8.30.11 @ 4:38PM

You are correct, sir---$1.6 T in reserves in banks, another $2 T in Fortune 500 corporations, at least several hundred billion in reserve in smaller companies. Nobody's going on a hiring binge when they're not sure they'll be able to make payroll next quarter.

Al Adab| 8.30.11 @ 1:11PM

What has always confused me about the witholding system is that government takes it weekly, keeps it a while, then gives more back than what was witheld. How do they do that? Why isn't it ours to keep in the first place?

LC Jack| 8.30.11 @ 4:20PM

The answer is that it's a Ponzi scheme, plain and simple. The tax funds are immediately put into the general fun and the pols use it like a slush fund for pork projects, voter buying schemes, etc. The Ponzi scheme only lasts if more folks are brought into the deal. Payroll taxes ARE most assuredly your property. The government is taking those funds by threat of punishment. The system is broke, because of the explosion of the boomers going onto SS, Medicare, etc. There aren't enough workers now to fully fund the benefits ergo we have to borrow more and more. The grand scheme to put Dems in power for decades is thoroughly broken. It's not a matter of grandpa getting less of his SS check, it's a matter of not getting a check at all.

miken| 8.30.11 @ 2:29PM

How would a payroll tax cut applied on the employer's side put cash in the hands of the most liquidity strapped workers?

Teflon93| 8.30.11 @ 4:40PM

Their claim is that workers with jobs will spend more money than workers without, which is belied by their simultaneous claim that unemployment benefits will result in stimulus spending as workers receiving them spend the money.

How many people do you know on unemployment running out to buy a new car or home?

LC Jack| 8.30.11 @ 6:44PM

Hey what are you doing? Stop bringing facts into a perfect progressive meme. /sarc

chris murphy| 9.1.11 @ 12:00PM

Unemployment benefits need not be spent on big ticket items to stimulate the economy. Arguably benefits spent on everyday expenses our more stimulative because they are spent on locally produced rather than foreign produced items and services.

ิเลสเบี้ยน| 8.31.11 @ 6:48AM

good information ,thank you to share,Im glad to read

chris murphy| 9.1.11 @ 11:56AM

"it's not clear to me why exactly it's so much more desirable to have people spend money rather than pay down their debts."

Because as you yourself point out in your very next sentence the SOONNER consumer spending picks up the better off the economy will be. If aggregrate demand can be increased NOW rather than after consumer debt has been paid down we can increase GDP growth and employment NOW. This in turn will make it easier for consumers to be pay off their debt in the long run.