Indiania Gov. Mitch Daniels, who has been mentioned as a possible 2012 presidential candidate, proposes an emergency one-year suspension or reduction in the payroll tax in today’s Wall Street Journal to spur job creation. It’s an idea that I also floated during the initial economic stimulus debate as an alternative to Democrats’ focus on government spending.
A reduction in the payroll tax would boost the economy in several ways. Like any reduction in taxes, it would mean that individuals would be able to keep more of their earnings, and thus have more money to inject into the economy. But the unique aspect of the payroll tax is that it’s also paid by employers — it is, in fact, a tax on employment. If you were to lower or eliminate the payroll tax for a period, it would make it effectively cheaper for businesses to hire new workers, or to at least maintain their current workers, until the economy improves. Keynesians have traditionally opposed the idea of a payroll tax cut because they believe that in a bad economy, people would save more of the additional money they’d be taking in, and so they prefer to have the government spend the money.
The federal government collected $891 billion in payroll taxes in 2009 and is projected to take in $862 billion in 2010, according to the Congressional Budget Office. That means that a full one year holiday would, in monetary terms, be something along the lines of the economic stimulus package, which cost $862 billion.
In his op-ed, Daniels proposes a number of ways to make up for the lost revenue from the payroll tax holiday. The lowest-hanging fruit would be to use unspent stimulus and TARP dollars. Though according to Pro Publica, only $134 billion in stimulus remains unspent and uncommitted, and remaining TARP money, at least in theory, is supposed to be put back in the treasury for deficit reduction.
But Danleis has a number of other creative ideas that are a bit fresher. He proposes giving the president the power to spend less that Congress appropriates, a power he has used as governor to maintain a balanced budget and AAA credit rating for the state. He suggests a federal hiring and pay freeze, or even cut, as federal pay “vastly outstrips private-sector wages…”
Congress would have had much more money to play with had it not wasted money on the failed economic stimulus to begin with, but the idea of a payroll tax holiday — or at least reduction — is still worth considering as a means to boost employment.