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.