Republican Tax Increases

by on August 22, 2011 at 7:34 am in Economics | Permalink

If Republicans have their way, taxes will increase next year by $120 billion. Republicans in favor of tax increases? Sadly, yes.

Last year the payroll tax on employees was cut from 6.2% to 4.2%, a policy that President Obama supported. Economists from across the political spectrum have also expressed support for a payroll tax cut including Keynes, Mankiw, Robert Reich, Dani Rodrik, Tyler and myself. The CBO scored a payroll tax cut as among the most effective policies for increasing employment, although it would have been better to cut the employer side of the tax.

The payroll tax cut was temporary, however, and is scheduled to expire next year. So who is in favor of increasing taxes?

Many of the same Republicans who fought hammer-and-tong to keep the George W. Bush-era income tax cuts from expiring on schedule are now saying a different “temporary” tax cut should end as planned. By their own definition, that amounts to a tax increase.

The tax break extension they oppose is sought by President Barack Obama. Unlike proposed changes in the income tax, this policy helps the 46 percent of all Americans who owe no federal income taxes but who pay a “payroll tax” on practically every dime they earn.

House Republicans appear to be most in favor of increasing taxes although some Republican Senators have also said they want to raise taxes. The failure of Republicans on this issue lends credence to Paul Krugman’s arguments:

How can [Repubicans not want to cut the payroll tax], when Republicans love tax cuts? The answer is, they don’t. They love tax cuts for the rich. Tax cuts for ordinary workers, many of whom will be those hated lucky duckies whose incomes are too low to pay income tax, are if anything something Republicans dislike.

Also, the GOP is against any idea that (a) comes from Obama (b) might help the economy before the 2012 election.

To their credit Romney and Gingrich are more supportive:

Former Massachusetts Gov. Mitt Romney did not flatly rule out an extra year for the payroll tax cut, but he “would prefer to see the payroll tax cut on the employer side” to spur job growth, his campaign said.

Former House speaker Newt Gingrich said Republicans will fall under increasing pressure to extend the payroll tax cut. If they refuse, he said in a recent speech, “we’re going to end up in a position where we’re going to raise taxes on the lowest-income Americans the day they go to work.”

Unfortunately, outside of the White House, Democrats are also not pushing for an extension of the tax cut.

Many Democrats also are ambivalent about Obama’s proposed tax cut extension. They are more focused on protecting social programs from deep spending cuts.

It’s a bad idea to raise taxes on working Americans in a weak economy and with interest rates so low the gains from reducing the deficit from current spending are low. Our political system is so dysfunctional, however, that Republicans may fail to support effective tax cuts precisely because a Democratic President regards them as important for economic growth.

Hat tip: Erik Brynjolfsson

Andrew' August 22, 2011 at 7:43 am

Well, first of all, when it pleases some people, Social Security is a self-contained program that funds itself. When it doesn’t suit those people, it can be anything they want.

david August 22, 2011 at 8:32 am

The demand is only that one be consistent when invoking either categorization in an analysis. It’s just an accounting line in the sand and has no independent meaning.

Andrew' August 22, 2011 at 9:08 am

It is used politically, just as TallDave indicates about the Trust Fund which is mythological. If it is not a pay-as-you-go system, which is obvious now, and just a revenue stream and a separate spending program, then that changes how you view the revenue and the spending. You can use the revenue for stimulus, but then the people who pay in aren’t ‘owed’ anything on the back end.

MikeDC August 22, 2011 at 8:00 am

Yes, our political system is at least as asinine as this blog post.

TallDave August 22, 2011 at 8:12 am

Is Social Security primarily a welfare scheme or a mandatory retirement savings system?

People on the left generally don’t want to see it become perceived as the former, because welfare schemes are unpopular with Americans, which is why we have ridiculous fictions such as SSTF.

I’m fine with the notion of making an end to the pretense of a mandatory savings system, but let’s also not pretend the hypocrisy here extends only to Republicans.

Andrew' August 22, 2011 at 8:32 am

It’s not a mandatory savings system, because as you state, the SSTF is a mandatory government spending system. Now that it is no long running a surplus using it as a stimulus is problematic to me (not that I disagree with why economists might agree with it). I don’t have to believe anything non-hypocritcal about Republicans to also not believe PK’s narrative. PK snidely (but I repeat myself) blows off that 46% of people don’t pay income taxes, but of course, the SSTF just happens to be those peoples’ income taxes.

Dirk van Dijk August 22, 2011 at 3:47 pm

So in other words you think that one of the key economic problems in the U.S. is that the after tax incomes of the poor in the U.S. (you know the 46% that dont pay income taxes) are too high!

Frank August 22, 2011 at 5:31 pm

Exactly. I think its clear that in order to save our economy we need to shift the entire tax burden to the low end of the income spectrum. Everyone knows that those with the highest incomes use their money to make “investments” which grow our economy. Those with low incomes just spend their money on stupid stuff like food and clothing.

Floccina August 22, 2011 at 11:43 am

People on the left generally don’t want to see it become perceived as the former, because welfare schemes are unpopular with Americans, which is why we have ridiculous fictions such as SSTF.

And yet welfare schemes proliferate in the USA and are well supported from AFDC to food stamps to subsidized housing to free education to medicaid to private charities. The left thinks or fears that USAers will not support welfare but I think that they are wrong.

Michael Cain August 22, 2011 at 1:06 pm

And yet welfare schemes proliferate in the USA and are well supported from AFDC…

Yes, AFDC was so well-supported that a Republican Congress and Democratic President replaced it with a non-entitlement program back in 1995 (TANF). And while there is evidence that it worked reasonably well when the economy was expanding and creating lots of new jobs, it doesn’t seem to have worked out nearly so well for the poor during a recession and/or a jobless recovery from one.

TallDave August 23, 2011 at 1:31 pm

Even a majority of Democrats think too many people get welfare.

http://www.rasmussenreports.com/public_content/lifestyle/general_lifestyle/august_2011/71_say_too_many_people_get_welfare_who_shouldn_t

The overall number seems to be about 70%.

Donnie August 22, 2011 at 8:21 am

Romney and Gingrich don’t have a vote on the issue. I’m not sure why their opinion matters very much.

Ken Rhodes August 22, 2011 at 2:02 pm

So Donny, what are you saying here? You don’t have a vote, so your opinion doesn’t count?

dan1111 August 22, 2011 at 8:31 am

Extending the payroll tax cut is conceptually different from extending the Bush tax cuts. The Bush cuts were intended as a permanent cut in tax rates, with the expiration only put in out of political necessity to get it passed. The payroll tax cut was intended by all to be a temporary measure.

Not that I necessarily think the Republicans are doing a great job on this, but their position is not totally incoherent.

Bill August 22, 2011 at 8:35 am

“The Bush cuts were intended as a permanent cut in tax rates, with the expiration only put in out of political necessity to get it passed.”

That’s an interesting story, because CBO projections showed that it would blow a big hole in the budget if it went beyond ten years.

dan1111 August 22, 2011 at 8:46 am

I agree: Republicans in the Bush years were very irresponsible on the issue of the deficit. Still, I think the point holds.

Andrew' August 22, 2011 at 9:18 am

PK has to narrate it that a tax cut is just a tax cut so he can say Republicans hate one of the groups on our de facto flat tax.

rpl August 22, 2011 at 4:14 pm

It seems weird to call the social security tax a “flat tax” when its marginal rate drops to zero for income above the wage base.

Tom August 22, 2011 at 7:40 pm

Payouts also have a cap. When return rates are calculated, the higher the income, the lower the rate of return – into the negative numbers.

MaxUtil August 22, 2011 at 9:16 am

OK then, a thought experiment. If Obama proposed a one year lowering of the capital gains tax and made very clear that it was “intended” to only be temporary, would the Republicans denounce it as “budget busting” and summarily reject it?

Andrew' August 22, 2011 at 9:22 am

Are you asking if Republicans hate Obama or hate the poor?

Dirk van Dijk August 22, 2011 at 3:50 pm

Clearly that hate both

dan111 August 24, 2011 at 2:19 am

I’m not sure it is possible to predict how such an uncharacteristic move by Obama would play out.

Frank August 22, 2011 at 9:12 am

It matters not a whit from which side of the market a tax is collected.

Joseph August 22, 2011 at 9:23 am

It does when minimum wages or sticky wages are binding.

Frank August 22, 2011 at 10:28 am

Coneded.

Mike August 22, 2011 at 11:22 am

Don’t concede a thing, Frank. It’s already well known that statutory incidence doesn’t imply economic incidence. Few people are arguing that wages aren’t ticky in the short run, but sticky wage theory falls apart with labor turnover and effective wage cuts by squeezing more work out of fewer workers.

As others have stated, Social Security was supposed to be a self-sustaining system of forced retirement savings, but has morphed into a massive redistribution program. This apparent philosophical divergence only reveals more clearly the man behind the curtain.

Krugman, like every other liberal, speaks of taxes as if they belong to government. I do not support lower taxes on the rich because I give a damn about the rich. I care that each American is treated equally by the tax code with an equal marginal tax rate. If that lowers the marginal tax rate on the rich, it is only correcting a wrong, not granting them a gift.

Dirk van Dijk August 22, 2011 at 3:53 pm

The income tax is the only tax that is spicifically allowed by the consititution, see 16th ammendment. Also if you think that everyoe should have the same marginal tax rate, then you must also agree that dividends and Capital gains should be taxed as ordinary income, and that things like the mortgage interest deduction are not fair and should be eliminated.

Tom August 22, 2011 at 7:38 pm

Dividends and capital gains have already been taxed, so taxing as ordinary income would put them into a higher tax rate. As for the mortgage deduction, renters already enjoy lower rates because interest is deductable for the landlord. This deduction actually levels the field.

mulp August 22, 2011 at 8:28 pm

“Social Security was supposed to be a self-sustaining system of forced retirement savings”

No it wasn’t. It was an insurance system because retirement savings had proven to not work, by the economy and banking (Wall Street and main street) of the 20s, yet again, having failed in previous banking and economic crisis.

Jim Nazium August 22, 2011 at 9:22 am

“… outside of the White House, Democrats are also not pushing for an extension of the tax cut”
So, clearly, these are Republican tax increases.

Ted Craig August 22, 2011 at 9:25 am

So, ending a program that didn’t work is a bad idea. That’s what your saying basically. Economists may agree that a payroll tax reduction is effective, but this real world exercise seems to show they’re wrong. That may have something to do with the fact that many economists, especially academic economists, have little to no contact with reality.

mig August 22, 2011 at 11:14 am

So…. what makes you believe they didn’t work?

Can you trot out your figures of what the economy would have been otherwise, without the payroll tax holiday?

Or is it just your assertion that “things are still bad, therefore the technocrats have failed.” ?

Ted Craig August 22, 2011 at 11:35 am

Yes, that’s my assertion. What real numbers can you “trot out?” real numbers, not projections.

Mike August 22, 2011 at 11:49 am

There you go again, mig, trying to shift the burden of proof.

It is precisely the burden of the tinkering technocrats to prove that their costly and wasteful boondoggles are progress as promised.

Would you prefer the FDA approve drugs based on their promised benefits, and then YOU, with a paucity of resources and data, would have to prove they are not safe or effective?

Andrew' August 22, 2011 at 12:07 pm

Kind of a gotcha, but you can start with the Obama Administration’s overly optimistic projections.

Orrin Hatch August 22, 2011 at 4:16 pm

Why yes, I would.

Pithlord August 22, 2011 at 8:17 pm

The FDA judges effectiveness based on a comparison of the treated population and the control population. That isn’t feasible with tax changes, so we have to compare what happened to a projection of what would have happened.

Dean August 22, 2011 at 11:16 am

So what’s the theory that contractionary policy during a recession is a great idea? Did you expect a minor tax cut to solve the biggest economic collapse since the Great Depression all on its own?

mulp August 22, 2011 at 8:52 pm

Tax cuts are contractionary because they drive decapitalism – the systematic consumption of capital.

Tax cuts led to deficits, so to cut spending, the easiest targets are investments that offset depreciation: replacing bridges, widening roads, replacing water and sewer systems, building sustainable power generation capital to replace pillage and plunder extraction.

When investment are cut, those bridges not built, the water pipes not replaced, the wind generators and power grids not built, jobs are lost, or the jobs end up promoting consumption, that is often funded by debt, because the tax cuts go to the wrong people. If 100 million families get a $1000 tax cut, that goes into banks or their equivalent money market funds which then drive these banks to make loans. They made loans to fund consumption of housing – instead of a generous 600-800 square feet per person, everyone consumed 1000 to 2000 – nothing was productive about the added housing space – no one earned a dime more from the extra living space that cost hundreds or thousands a year.

The Bush tax cuts drove the housing bubble and the huge increase in housing consumption that reduced the efficiency of the US economy – higher costs for housing with no benefits.

On the other hand, the tax cuts reduced the productive investments, so roads became less productive as the pot holes damaged cars and the congestion delayed traffic increasing costs. And the productive capital value of an old bridge like the one in Minnesota was positive until it failed and it became zero – much of the capital in the US is like that bridge – the wealth capital value which accounts for depreciation has been falling rapidly while the productive has remained constant. But at some point, the failures cascade and the productive capital value plummets rapidly.

We have not had the hundreds of failing bridges make the lack of investment obvious and we don’t do a corporate SEC compliant balance sheet on capital assets for the nation, so the tax cuts don’t seem like they cut any required spending. But we have had the loss of the jobs required to do that investment in capital that taxes pay for.

Captain Obvious August 23, 2011 at 8:55 pm

“The Bush tax cuts drove the housing bubble and the huge increase in housing consumption that reduced the efficiency of the US economy ”

Really? You’re just going to throw that out there and hope nobody notices what a steaming pant-load that is?

Maurits Bruel August 22, 2011 at 9:30 am

What exactly does Romney envision when he says “would prefer to see the payroll tax cut on the employer side”?

Would that mean that the individual would effectively take a pay cut which would be given to the employer? That may be their preferred outcome, but not very likely to achieve. I can also envision the GOP negotiating this:
Dems can continue the payroll tax cut
IF They extend the same tax cut on the employer’s side
AND pay for it with extra austerity measures

Bill August 22, 2011 at 9:43 am

More likely that they would pay for it by raising the SS cap.

Andrew' August 22, 2011 at 10:18 am

Why should the cap be raised?

TallDave August 22, 2011 at 12:24 pm

Because now it’s just another welfare system. That’s been the reality a long time.

Unfortunately, if Tyler is right about TGS, growth is going to be hard to find. One way to increase demand (that doesn’t involve massive debt) is to continue shifting the tax burden away from those with a higher marginal propensity to spend. Since the bottom half of the tax distribution already pay negative income taxes, that means cutting payroll taxes. This has the added benefit of reducing the high MTR the poor currently see.

I like this approach because it increases the likelihood we can do sensible things like pushing the SS retirement age north of 70 and reduce benefits generally.

Bill August 22, 2011 at 2:57 pm

For one reason, when we eliminated AFDC, what happened is that people who were on AFDC and would have been eligible for SS disability moved over to SS disability. But, guess what, those making $110k or less bore the burden of that shift off of general taxes to SS tax.

Oh, Robert Dole, how clever. Just insulating the rich.

TallDave August 22, 2011 at 4:17 pm

AFDC was never intended to replace SS disability, so unless you start from the proposition that the rich should pay for everything, that’s not a sensible objection.

Bill August 22, 2011 at 7:27 pm

I am sorry, but the facts are that people who were on welfare moved over to SS disability. Cities and counties assisted them.

TallDave August 23, 2011 at 10:54 am

Reading comprehension. My point was not that it didn’t happen, but that AFDC was not intended to replace SS, so moving them to SS (where they belonged) was right and proper.

Cha Grin August 22, 2011 at 9:54 am

Alex — Very disappointing to see you give even a little credence to the notion that Republicans dont want to see the economy recover and are willing to let Americans suffer for political gain. Never thought you to be so nihilistically cynical.

mjw149 August 22, 2011 at 10:36 am

It isn’t cynicism if the evidence supports the conclusion, and there is lots of evidence piling up, from the Bush years until now. As someone who voted for Bush, I’ve come to agree with the view that they’re just taking bribes from the rich to help the rich. They don’t even want to regulate the banking industry after a major fraudulent collapse or raise taxes during a huge deficit whose spending directly benefited themselves.

Who else do their policies benefit? We’ve only gone from bad to worse as our governments wither under GOP influence and corruption takes hold in places like Texas and with programs like Med Part D, inefficient by design.

Andrew' August 22, 2011 at 11:35 am

Back up. This is Krugman saying Republicans believe in Keynesianism so that he can say that the only reason they don’t want it is to hurt the economy so that voters will hurt Obama.

That seems like cynicism regardless of how you feel about the portion of the first 8 years of the naughties where Republicans had total control.

The Anti-Gnostic August 22, 2011 at 10:01 am

The Grand Old Plutocrats.

Mike August 22, 2011 at 10:37 am

No-no its, Grifters, Oligarchs and Plutocrats

Bill August 22, 2011 at 10:06 am

There is a little behavioural economics going on here, as well as some greater kick from cutting taxes to those with the highest marginal propensity to consume.

On the behavioural side, ask yourself this question: if you were to get a lump sum tax cut at the end of the year, versus a slightly larger, but unnoticeable paycheck each pay period, which tax cut would be more likely be spent or saved? The slightly increased paycheck.

Earnings up to $110k get the tax cut (those earning more than $250k get it too, up to the $110k). Who has the higher marginal propensity to consume?

If you were to give an across the board income tax cut, those earning less than $30k – $40k wouldn’t see it (if they were a family of four), and those making more than $250k would spend it.

So, if you had to choose: across the board tax cut or SS tax cut, which would you choose to stimulate. Or, neither.

Bill August 22, 2011 at 10:53 am

correction: making more than $250k wouldn’t spend it

Ted Craig August 22, 2011 at 11:41 am

Bill, what are you basing that on? Most people don’t notice the changes in their pay. Based on my experience, if you want to people with less money to spend more, give them a lump sum. This is not theoretical. It happens every spring when tax refunds start coming back.

Floccina August 22, 2011 at 12:04 pm

The rich have a higher propensity to spend. People do not see that because they do not understand that investing is spending and paying down debt is saving.

RZ0 August 22, 2011 at 2:26 pm

Ted and Floccina, I don’t think you are correct. Most rich people have greater savings than poor people. The rich people have a lot of savings, because that is the definition of rich. The poor people do not have anything in savings, because that’s the definition of poor.
I think you are assuming that upon receiving a lump sum, rich people will act like poor people and spend almost all of it, while poor people will act like rich people and spend less.

Floccina August 22, 2011 at 3:36 pm

http://www.federalreserve.gov/pubs/feds/2005/200532/200532pap.pdf

I am an example, I have a cushion of savings so any more money that I get is spent right away on buying stocks or on consumption. If I was in debt and I got more money I might pay down debt which is savings as debt is negative saving.

Ted Craig August 22, 2011 at 8:19 pm

No, no, the opposite. I’m saying the poor will spend as soon as the get a lump sum, but they won’t notice a slight increase.

Bill August 22, 2011 at 8:41 pm

Ted, if the poor don’t notice a slight increase, and they don’t save, then you are saying the poor will spend it.

Bill August 22, 2011 at 1:29 pm

Ted, You might want to look at some of the materials by Thaler and Shiller–.

You can also flip it and think of this a different way: if your SS contribution were to go up by 2%, would you notice? Do you notice sales taxes, special assesments for stadiums that creep into your restaurant bill?

Flocinna below is right–marginal propensity to consume is high for lower income folks. With Treasuries at 2%, people with wealth are stashing, not spending.

When I got my lump sum tax stimulus money under Bush and then stupidly under Obama, I saved it, and used some of it to buy a Korean TV.

Floccina August 22, 2011 at 3:45 pm

I think that you read me wrong.

With Treasuries at 2%, people with wealth are stashing, not spending.

When I got my lump sum tax stimulus money under Bush and then stupidly under Obama, I saved it, and used some of it to buy a Korean TV.

What form did you save it in? Buying stocks or other investments is spending not saving and paying down debt is spending. When you buy a stock someone gets that money right away. If you put it in a bank or hold it as cash it is saving.

If you pay down a loan that is savings as you have reduced negative savings that is debt.

Further investments in something like insulation or a new air conditioner is an investment just like buying a stock and it will produce future savings (like a dividend) but it is spending. So investing is spending.

Bill August 22, 2011 at 7:29 pm

Flo, Stocks had already been issued. This is not new investment. Our problem today is not an excess of savings, but a shortage of demand.

Ted Craig August 22, 2011 at 9:39 pm

Bill,
Economic recovery takes big ticket spending (housing, cars). Lump sums drive that spending by providing down payments. People spend in greater amounts when they feel richer. If they don’t notice it, they may spend more, but not a lot more.

The Anti-Gnostic August 22, 2011 at 10:08 am

Seriously, this is exactly the problem:

” Unlike proposed changes in the income tax, this policy helps the 46 percent of all Americans who owe no federal income taxes but who pay a “payroll tax” on practically every dime they earn.”

–So 46% of Americans with no income tax liability at all
–The EIC (a naked transfer payment)
–Accounting legedermain and sheltered income sources for the high end earners
–Federal employees and contractors
–Retirees

Voting is a waste of time.

zbicyclist August 22, 2011 at 10:30 am

I don’t quite see how retirees are affected by the payroll tax. (on the taxes-in side)

Bill August 22, 2011 at 10:58 am

Yeah, like students who make less than $20k (and will be making more than that if they can get through school, like the disabled, like the family of four living at the poverty level; like the family of four earning $40k and paying property and sales and state income taxes; like the elderly don’t receive the cut, so right there you are you are lopping off a 1/3 of your number.

Anti-gnostic, I do hope that you believe you’re voting is a waste of time.

The Anti-Gnostic August 22, 2011 at 11:35 am

Bill – you’re killing me pal. Seriously, I am rending my shirt and weeping great tears over all these poor downtrodden folks toiling away while me and Scrooge McDuck cackle and gleefully rub our hands.

Do you understand what happens when net tax consumers outnumber net tax payors and you give everybody a vote? Can you even FATHOM why that may not be a good idea?

Attorney at Flaw August 22, 2011 at 1:06 pm

I’ve long thought that the poors shouldn’t be allowed to vote.

Bill August 22, 2011 at 1:32 pm

Anti–
Here are some facts for you.
In 2001, the top 1% paid 28% of Adjusted Gross income in taxes. In 2008, they paid around 21% of AGI in taxes.
I can see why you say “me and Scrooge McDuck cackle and gleefully rub our hands.”

The Anti-Gnostic August 22, 2011 at 1:58 pm

Holy crap what a scoop. The super-rich evade taxation? Does the NY Times know this?! Does Alex Tabarrok??!!

????!!!!

I think all those tears welling up in your eyes as you looked out your window and beheld the plight of the poor, the students, the halt and the lame may have obscured your reading of my original post.

RZ0 August 22, 2011 at 2:30 pm

Fear not, Anti-Gnostic. The income tax is only one of many assessed. The payroll tax, for example, hits the poor much harder than it hits the rich. Gasoline taxes do, too.
Then there are state and local taxes. People of all income levels pay those, too.
I have great confidence in government’s ability to find a way to get something out of every breathing person in the republic.

steve August 22, 2011 at 10:17 am

There is an argument to be made that businesses hire based on their expected labor costs and that they have a fairly long time horizon. Temporarily changing the payroll tax won’t matter if employers are planning expenses for 5+ years down the road.

Dean August 22, 2011 at 11:19 am

Lots of businesses only look at 2 year windows, and besides that, if you believe that there will be future growth, a temporary reduction in labor costs is fine because you’ll be seeing increased demand by the time the cut expires.

D August 22, 2011 at 12:07 pm

Really? 5 years? You think Wal-Mart plans its hiring that far ahead?

And in any case the goal of a payroll tax cuts is to subtly boost spending by employees, not employers.

The stimulus tax cuts worked the same way. Instead of sending everyone a big check (like Bush), they spread it out over several months.

Jim August 22, 2011 at 10:23 am

>”Many of the same Republicans who fought hammer-and-tong…”

So, according to this article, “many” means “four.”

That’s certainly enough for useless partisan tools like Krugman to make a post out of, but I expected a little more from MR. Perhaps that was silly of me.

Angry Linguist August 22, 2011 at 12:53 pm

In logic, “many” just means “at least two,” just as “some” means “at least one.” It might not be the colloquial definition, but it certainly doesn’t make this a hit piece.

Chuck August 22, 2011 at 10:29 am

Props to you, Alex!

Brian J August 22, 2011 at 10:41 am

I’ve suggested that there be a huge or even total payroll tax holiday for at least a year, if not two or three. If the Republicans need to get something out of this, why not dramatically cut or simply eliminate the corporate tax? The economics of this are probably more neutral, but politically speaking, it’s probably more beneficial for Democrats to do this. The people on the left that are most likely to be upset about this are the types that are usually upset anyway, but to the extent that it has any positive impact, it probably helps more Democrats than Republicans win reelection by giving them a stronger economy. It also gives them a good talking point to beat back any anti-business charges, and over the long term, it completely removes it as a campaign issue for Republicans and might make it easier to implement pollution taxes.

Nick Bradley August 22, 2011 at 10:50 am

Pretty lousy blog post — Tyler must be out.

What you don’t understand is that there are two types of tax cuts: tax cuts to stimulate private consumption, and tax cuts to raise long-term returns and incentivize certain activities.

Payroll tax cuts are solely designed to boost private consumption — might as well send people a gift card for Walmart. Supply side tax cuts create long-term growth, as long as the savings from reducing deadweaight loss and increasing efficiencies are greater than the interest payments.

Bernard Yomtov August 22, 2011 at 2:52 pm

Here’s a clue, since you seem to be in need of one: If consumption doesn’t increase business is not going to expand. If you’ve got a warehouse full of unsold inventory not all the tax cuts in the world are going to persuade you (well, they might persuade you, but not a sensible person) to produce more.

Economic growth means producing more goods and services that someone is willing and able to buy.

Call Laffer and get a refund on that Kool-aid.

Pithlord August 22, 2011 at 8:19 pm

Payroll tax cuts also reduce the cost of employing labor.

8 August 22, 2011 at 11:37 am

They might as well debate whether unicorns crap skittles or M&Ms. Later, Matt Taibbi will discover that both M&Ms and Skittles are made by the same company!!!

Floccina August 22, 2011 at 11:38 am

If the payroll tax is truly a tax, rather than a premium on a retirement annuity, then SS is a welfare program. If SS is a welfare program, it is a really retarded one because it pays out most to least needy.

SheetWise August 23, 2011 at 11:51 pm

Bravo! Exactly! A plan well designed for the people who sold it so well.

“Economists from across the political spectrum have also expressed …”

What is this post about? When and why did people start calling social security premiums a “payroll tax”?

Robert August 22, 2011 at 11:43 am

What I don’t understand with the argument presented in the blog post is this:

If I am a business and regardless of pricing my demand is 100 widgets (or loaves of bread, or computers, or cars, or whatever the case may be) regardless of pricing, and it takes 10 employees to produce those 100 widgets (or loaves of bread, or computers, or cars…), how is cutting the tax rate on the employer side going to help? From what I can tell, wall street companies are buying back stock rather than hiring more people because of demand issues. Again, why hire if hiring isn’t going to increase my efficiency? Sure I could drop my price with the additional money, but if I’m Starbucks, and the price of coffee is in a free fall (as it is right now) , but my firm demand is still right where I want it, I’ll keep my price right where it is, and pocket extra profits, which is exactly what Starbucks announced this morning they were going to do.

In order to solve the problem with the economy, we need to look at the demand side of the equation (meant…the workers, not the employers) . Until those workers get their debt levels under control, they’re not going to spend. Until they start spending (and buying cars, and widgets and things) employers will have no need to hire. Why would I hire an additional worker if my 10 workers are succesfully producing the 100 items that are needed to meet the demand? The fact of the matter is, I wouldn’t. All I would do (and all most of corporate America is doing right now for that matter) is pocket the additional profits. Corporate america is being a perfectly rational player in the grand scheme of things, so I don’t fault them.

Bill August 22, 2011 at 1:36 pm

In your example, its not about you.

It is about the marginal employer who would purchase and make the hiring decision today. It is also about having the government move up some purchase decisions on infrastructure that they would have to purchase in the future.

And, then it is about you when that newly hired marginal worker increases marginal demand.

Robert August 22, 2011 at 2:26 pm

My argument wasn’t about me, my argument was about what would a rational employer do with extra cash. If the rational employer had extra cash, but didn’t have demand to justify hiring another person, the rational employer would not hire an additional person, and would instead pocket the cash. There are so many examples of this in today’s business environment that I can’t even begin to list them, but most prominently, Lowe’s home improvement stores who decided to initiate a stock buyback program rather than hiring new people with their excess earnings, and Target corporation who did the same thing. I find both of these quite interesting because both Lowes and Target in my general area could use additional employees (I waited in line at my local Target store for nearly 20 minutes the other day because they didn’t have enough staff to cover the demand, but that particular store isn’t hiring for any positions).

The basis of my argument boils down to this: Low demand = poor jobs numbers. Strong demand = strong jobs numbers. Unfortunately businesses need to see steady demand before they hire, as hiring is a long term investment, as it is very costly to let someone go without reasonable cause. Any tax credits or cuts (temporary or long term) for them at this point will not convince them to hire. The only thing that will convince business to hire is improved demand for their goods and services. I’m actually of the persuasion that there shouldn’t have been a tax holiday on the payroll tax for either employers or employees, but given the choice of where to put it, putting it to the employee seems to make a far bigger impact, even if it is short term.

SheetWise August 24, 2011 at 12:02 am

I would love to hire a couple people right now — but I don’t want to adopt them. If healthcare is treated anything like unemployment has been … let’s just say that it’s a chance I’m not going to take. If it can be done with capital investment and outside services, I don’t need any employees.

Steven Kopits August 22, 2011 at 11:44 am

As an employer, I don’t believe payroll taxes are influencing hiring decisions, at least not for us. Healthcare costs do, and so we don’t offer healthcare coverage. (And why should we provide it, anyway?)

I personally do not think lower SS costs stimulated hiring. The business sector is revenue-constrained, not cost-constrained.

I think the Tea Party view is that you get what you pay for. The government is a common pot for common expenses, not a redistribution vehicle.

In any event, I think there’s a feeling it’s time to get the fiscal house in order. Letting the payroll tax holiday lapse is a step in the right direction.

Ted Craig August 22, 2011 at 11:49 am

See folks, this is what you call reality.

mw August 22, 2011 at 12:38 pm

n=1
my kind of reality

Chuck August 22, 2011 at 1:07 pm

I believe the tax cut is primarily intended to stimulate demand, actually, and that is why the cut is on the employee side rather than the employer side, no?

Bernard Yomtov August 22, 2011 at 2:56 pm

I personally do not think lower SS costs stimulated hiring. The business sector is revenue-constrained, not cost-constrained.

The SS cut was intended to stimulate hiring by lowering your costs. It was intended to do so by giving workers more money to spend, thereby stimulating demand, thereby increasing business revenues. That’s exactly the problem you correctly identify. So stop and realize that the ida behind the cut was to help solve it.

Steven Kopits August 22, 2011 at 3:55 pm

I can’t say that I think the payroll tax cut helped solve much of anything, but we are hiring. We are looking for an analyst for oil field services for strategy work and M&A. For our Wall Street office. Interested readers should send me an email.

Michael August 22, 2011 at 11:51 am

I’m certainly happy to keep the additional 2% of my income, but did the temporary cut on the worker’s portion of the payroll tax actually increase hiring? I invested and spent my extra income just about equally, but I am guessing that more people spent the extra cash, even if it was on additional energy costs.

Would a temporary cut on the employer’s portion have done anything significant either? Probably not. Would the extra $600 in cost savings on a $30/year worker really be enough to entice an employer to hire someone? NO! It just makes that $30k/year worker become a $29.4k/year worker … big deal

Wouldn’t it be better to just eliminate the 10% bracket (and possibly reduce the 15% bracket) This would have the same effect as the payroll tax cut for lower income earners. Or we could just confiscate some extra income from the rich and pay more people not to work because that is the best way to stimulate the economy … or so we’ve been told.

Rich Berger August 22, 2011 at 12:15 pm

I certainly didn’t mind the reduction in my considerable tax bill. However, I believe that cuts in tax rates are more effective for two reasons – they increase the after tax return to work, and they smoke out more taxable income as the value of tax shelters (at the margin, natch) is reduced. Also, the bulk of the tax rate cuts were given to the “non-rich”. I think the figure was roughly 2/3rds. Also, the economy began its climb almost immediately after the effective dates of the cuts were accelerated in May 2003. As far as those who make the claim that the Bush tax cuts blew a hole in the budget, why not blame Reagan, who indexed the brackets to inflation and dropped the top rates to 28% from 70%. The hole in the budget is due to the holes in the Democrat party, who have held power since 2007.

Andrew' August 22, 2011 at 1:14 pm

Ah, so when they talk about tax cuts for The Rich, you are The Rich.

Rich Berger August 22, 2011 at 1:42 pm

I had forgotten about that, but, yes, you are correct.

D August 22, 2011 at 1:25 pm

They DID blame Reagan. Hence the Clinton tax increases.

Ken Rhodes August 22, 2011 at 2:13 pm

…and hence the Clinton balanced budget…

Rich Berger August 22, 2011 at 4:47 pm

Of course, the Clinton tax increases did not balance the budget. The budget fight in 1995 did that.

Andrew' August 22, 2011 at 12:43 pm

I was thinking what could Paul Krugman offer in exchange aside from insults. Then it dawned on me, let people sell back some of their future benefits in return for the tax cut today. Probably sounds too much like privatization.

Michael August 22, 2011 at 4:29 pm

I’m in my early 30’s,

I’d give sell back all of my future benefits in exchange for keeping the 6.2% for the rest of my working career… I don’t even care about the portion my employer pays.

I hated FICA from the very first paycheck I received because even at 15 I was smart enough to realize that it was a Ponzi scheme.

mulp August 22, 2011 at 8:12 pm

You have been getting a Social Security benefit for a decade or more already – how are you going to give that back? Actually, as one or both of your parents paid FICA for a decade, you have been getting a Social Security benefit for more than three decades, paid for by your parents, one that would last in some circumstances for life. However, you are now entitled to a lifetime benefit for the rest of your life after a two year waiting period. These Social Security benefits represent one-third of the total benefit dollars paid.

And you can’t afford a “free market” equivalent, not because Social Security destroyed the market for it, but because no one could figure out how to make a profit from such insurance before the Federal government acted.

I grew up hearing over and over, Social Security is a ponzi scheme that you will never get because it will bankrupt the nation. I’d say I heard that repeated steadily since I proudly wore an “I Like Ike” button. I saved as if I wasn’t going to get Social Security and planned to work until I was 70 or 75 in an upper income sector. In 2001, that expectation turned from “at risk” to “totally wrong”. The tax cuts to create jobs totally failed me in the past decade. The education to create opportunity to get a better job failed. The stock market returning 10% a year easy failed me with the past decade being at best flat, but I think down by 10%. Real estate as an “investment” has had a 0% return outside the benefit of housing.

I was lucky for more than 50 decades and by saving heavily for decades, bad luck has left me still very lucky,but Social Security is a backstop I now see as necessary for me, a very lucky man. Very few people can be as lucky as Warren Buffett, and I doubt you have accomplished what he had by your age, so you aren’t very lucky; Warren Buffett does not claim his wealth is the result of anything but luck. (If it wasn’t luck, you aren’t as well off as Buffett at your age because you are just too lazy….)

And when I look at the FICA taxes collected from my income which was at the max for about 25 years, it is a small amount given the benefit I’ve shared with my peers before we reached 62, and represents an important foundation as those who have survived begin receiving the old age benefit. A benefit that is virtually impossible to live on, so significant added savings are needed to survive without becoming a ward of the welfare state, one that existed prior to Social Security, but that became more regular and fair after.

The Anti-Gnostic August 23, 2011 at 11:15 am

Good for you getting in on the front end gramps, but the Ponzi scheme is running out of suckers.

lonelylibertarian August 22, 2011 at 12:55 pm

Very disappointing post…

In the grand scheme of things this is an almost trivial matter – a distraction.

The really hard work is going to be to get away from this “gotcha” crap and start talking about what “living within or means” will entail.

I seem to recall hearing that 40 cents of every dollar we are currently spending needs to be borrowed – that is neither sustainable or rational…

What the hard core of the Tea Party wants as a solution is that we stop spending the 40 cents – and those of us who think that is a good idea understand that doing this will involve…
1. Reduced defense spending
2. Reduction in contractual entitlements – both benefits and obligations for thins like health care.
3. Reduction in the public sector – including public universities like GMU

So making a big deal of whether a politician or party favors the continuation of a relatively small tax cut is a distraction.

Focus on how we “downsize” the public sector to a level that we can afford first – then we can talk about how we should pay for it….

D August 22, 2011 at 3:39 pm

Define “afford.” Revenues as a percentage of DGP are at a 50 year low, partly because of Bush and stimulus tax cuts. Republicans won’t even consider raising taxes. The TEA in Tea Party stands for “Taxed Enough Already.”

TallDave August 22, 2011 at 4:20 pm

That would be fine, except that spending is at a 50-year high.

mulp August 22, 2011 at 8:22 pm

Why did the Tea Party wait almost a decade to complain about the systematic out of control deficit spending?

Why didn’t the Tea Party become extremely active in 2002 when the surplus that wasn’t a surplus became a deficit, and certainly 2003 should have been the crisis point when tax cuts were failing to stimulate the economy to create more great job opportunities than the 90s, at the same time entitlement spending was added, and the military spending increases were just totally out of control without any regard for the current deficits plus the certain long term deficits the wars would cause to rebuild the military assets, but even greater to provide the health benefits to the soldiers chewed up in the war.

I see the Tea Party as calling for national fitness, but only after everyone is at least 60% overweight, demanding everyone lose 40% of their weight in one year. Why didn’t the Tea Party get on the fitness bandwagon when everyone was so happy we were only gaining 1% a year (the real deficit in 2000)?

Marian Kechlibar August 23, 2011 at 6:48 am

Why didn’t Civil Rights era start in 1865?

Why didn’t Libyan civilians mount a revolution against the Colonel in 1970?

Why have the Americans waited until 1770s to get rid of the King?

My answer: Popular sentiments take time to build, and decades are the norm.

Steve C. August 22, 2011 at 1:35 pm

If the Republicans were smart, they’d would say, “We think that’s a good idea, let’s make the change permanent.”

The personal and employer tax was set at 6.2% was because of the great SS funding scare of the early 1980s. The Greenspan Commission proposed increased SS tax rates as one part of a multipart solution to ensue the long term viability of the SS program. We’ve seen how that worked out in practice.

Bill August 22, 2011 at 1:37 pm

Yeah, we ran a surplus so we could give a tax cut.

mulp August 22, 2011 at 5:15 pm

It worked out extremely well, by funding Social Security fully for an added five decades minimum making it a century long program that provided great social benefits. If cutting taxes and deregulation had delivered the promised benefits of higher growth, greater employment opportunity leading to higher individual incomes, Social Security would have been fully funded until 2050 I’m guessing, with a much smaller short fall.

Perhaps the Tyler TGS argument is the US would have crashed into a Great Depression II without all the stimulus of tax cuts and deregulation, and the steady decline in employment opportunity over the past decade could have been much worse without those budget busting moves. But the TGS isn’t caused by Social Security which had been an institution for nearly half a century when Reagan put his full support behind maintaining and sustaining it for posterity.

Ignorant August 22, 2011 at 5:10 pm

Just what is the “payroll tax?” Social Security and Medicare tax? The employer’s matching “contribution”? Money withheld for income taxes? What? If it is SS and Medicare why not say that? -in which case it is a genuine tax cut (for the moment, to be made up later). If it is nothing but a change in the withholding rates it is no cut at all. This is highly trivial, but in reading the posts here it is clear to me that there are a variety of views, often inconsistent with one another.

porno August 22, 2011 at 9:50 pm

Yeah, we ran a surplus so we could give a tax cut.

regularjoeski August 23, 2011 at 10:10 am

This is a LOL example of bias, framing effect, and forcing the data to make unsupported conclusions. I could just as easily use this example to write “Democrats want to end SS”, “Democrats support tax cuts for all”, “Republicans are trying to save SS, democrats trying to weaken it”, “Democratic stealth plan to end SS”, “Democrats and economists agree raising taxes weakens the economy”. All explain the facts more consistently than this post. BTW-From an employer POV this tax relief does not encourage me to hire any more workers. The reduction came from the employees side, it did not reduce my costs at all. We could have just given everyone x dollars ala Bush.

Chris August 23, 2011 at 4:16 pm

Just so I’m clear, where does it say in the textbooks to refer to tax increases as ‘ending tax cuts’ when proposed by Democrats and as ‘tax increases’ when proposed by Republicans? First it was NPR, AP and the Times and now Marginal Revolution, too. Oy vey!

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