Would a payroll tax cut help avoid a recession?

Right now, probably not.  Here is an excerpt from my latest Bloomberg column:

The inclination in American politics is to cut the payroll tax on the worker side, not the employer side. That is the opposite of what should be done.

In a recession, the usual problem is that too many people are seeking too few jobs. The reluctance lies on the side of the employer, not the worker. So cutting the taxes paid by the worker won’t help much. In contrast, cutting the taxes paid by the employer might at least boost the demand for workers and thus stimulate employment.

In the long run, according to economic theory, it does not matter whether you cut payroll taxes for workers or employers; eventually wages will adjust so that the true, tax-adjusted set of wage offers ends up the same. But for the purposes of fighting a near-term recession, it matters very much whose taxes are cut.

Do read the whole thing.  Do note, however, that I am not currently expecting a recession, I just don’t see enough pointers in that direction, and furthermore most of the time recessions do not happen.

Comments

I Hope Not.

Pocahontas, stop acting like a disloyal Jew.

you don't have to be a dark psychic force
to figure out theres fixing to be a biggish
refugee/humanitarian crisis in central America!

It makes sense. I have heard that, to sustain the current boom (Brazilian miracle), Brazil's new administration is seeking to get rid of payroll taxes on the employer, replacing them with a fiscally neutral consumption tax.

But a consumption tax is actually a tax on businesses, an income tax with zero tax dodges.

No tax deduction for paying workers, so all the tax burden falls on businesses added on top of labor costs. Increasing business revenue increases business tax bills even if profits go down because labor costs rose.

;-)

Experience has been cutting the tax rate and eliminating tax dodges ends up with businesses finding paying workers costs too much because they get smaller tax cuts, so new ways to cut taxes are invented like refundable tax credits for paying workers, disguised as "investment tax credits".

When profit taxes were high, say 50%, investment created tax dodges in depreciation where the IRS paid 50% of the labor cost of building factories or machines, etc.

A consumption tax is simply eliminating 100% of the tax dodges for paying workers for anything: production, investment, interest/dividends on savings, etc.

But by imposing taxes on consumption, Brazil can cut payroll taxes, making it more acttritve to hire Brazilians instead of robots or outsource work to Red China. Also by making consumption harder, the government can stimulate savings and accumulate the capital the country we need for investments in the next phase of the boom. I would like to see long term thinming like that here in America.

Are you arguing the consumption tax will be paid to people to consume, but not work, so the tax does not apply to wages paid to workers?

If you are saying consumption must be limited to wage income, then you are taxing workers, forcing them to produce more by work than they will be able to consume because their wages must be paid first for taxes, then the remainder for reduced consumption.

My point is you can not avoid taxing both work and consumption because work produces and pays for what is consumed.

Taxes are a means of paying for the infrastructure of an economy, like rule of law, property rights, and insurance against hazard, like the hazard of all factors of production suddenly engaging in thrift.

Consumers are as critical to the economy as producers because without consumers, producers will produce nothing. Tanstaaafl.

Government is the borrower of last resort who is the consumer of last resort, buying durable goods from producers with money is will repay with taxes on the productivity of those durable goods.

As Adam Smith notes in his intro, the wealth in a nations wealth is the productivity of it's people, not the land, goods in warehouses, etc. But the people will produce only if consumers pay them to produce.

All taxes are levied on the activity of the economy with are the mutually dependent production wages and consumption spending. There is no one handed economy, but an economy that beats only by both hands clapping in sync.

The big issue is how to eliminate profit, with ensuring the lure of profits drives those with money to pay workers in the hope of selling what they produce for much more than their efforts plus your own, while not being required to pay others money so they can pay the profit you hope to collect.

If you tax consumption, you tax labor costs plus profits.

If you tax workers, profits do not get taxed.

If you tax profits, the theory is no one will pay workers when they see a shortage of supply which means they expect profits. Ie, Steve Jobs would never have created Apple because only by his belief he can make huge profits by creating the iPod, iMac, iPhone, because he hated the effort in producing product for which he had zero pride. Clearly, from his teen years, his only motive was high profits, and he was always charging rezllly high prices to kids and adults in the homebrew computer era.

Likewise, Bezos always stated that Amazon will always have huge profits because his only motivation is profits, not building a revolutionary Internet Everything Store.

And Elon Musk is clearly in it for the profits, with Tesla, SpaceX, Boring Co, reaping hundreds in billions in profits. He started the companies stated in was totally certain his $100 million would turn into $100 billion profit or else he would never spend a penny.

argumentum ad absurdum

Debating who pays taxes is like debating angels on a pin. People pay taxes because people are both workers and consumers, and you can't have one without the other.

The point is, it will be easier for Brazilian job creators create jobs if they do not have to pay for every job they create. You get less/fewer of what you tax. Taxing consumption instead of jobs will swift the preference curve and create jobs, which will strenghten consumer confidence and jolt the entrepreneurs' animal spirits. Even if there is a slight rax revenue fall, the government has fiscal amno because it expect to earn half a trillion dollars selling assets. This measure will soak the excess liquidity and help to control inflation without interest rate hikes.

Cut regulations. End childbirth leave.

Some regulations are being cut already. The penalities for speeding are being reviewed. Banks will be abke to open on Saturdays. Unions are being dismantled. Free market reforms are being implemented.

Brazil should protect the Amazon not set it on fire like savages.

1) Brazil is already protecting the Amazon. Most of the talk about Brazil burning the Amazon is anti-Brazilian, leftist slander. Brazil's President Captain Bolsonaro has fired the head of the National Space Research Institute for anti-Brazilian agitation.
2) The Amazon has nothing to do with tax policy whatsoever.
3) Some parts of the Amazon have to be burned to opens spaces for pastures. One must remember that there are hundred of milliins of Brazilians. The country eeds breathe space.
4) The situation is under control. There is no reason to believe there is a fire problem.

20% of the world's oxygen comes from the Amazon. You retards in Brazil need to get your shit together or we will invade your ass and overthrow your shitty fascist government.

1) Most oxygen comes from the sea.
2) The situation in the Amazon is under control. Anti-Brazilian agitators are trying to destabilize Brazil's regime.
3) Brazil's government is not fascist. It is a democratically elected government. The Brazilian people has stood up.
4) I am not Brazilian. I am Mr. Williams, from Andover, Minnesota.

A cool head on the internet ...

Or companies plan for a recession anyways and save the money anticipating lower demand for their products in the future.

Buying back stock while the stock prices are high so its easier to declare bankruptcy?

GM, GE, etc had high profits before 2007 which they used to buy back stock in preparation for recession? Since Trump took office, businesses have been anticipating recession by buying back stock at very high rates?

Odd for The Donald to tease a payroll tax cut. It was, as we know, just a tease.

From my viewpoint, we will have a spotty dip. That is, some parts of the country will have a deflating effect that will feel like a recession, but most of the country will hum along just fine. This is what is about to happen in the silicon valley. As inflated stock settles, and reduces the RSU money that fuel real estate purchases, houses are now going on contingent sale, and often below asking. This isn't an overall problem, but in the bubble of the valley, this is a recession.

Is the current flutter about a recession caused by a series of staff meetings at various media enterprises where pay cuts and layoffs were announced? Not public of course, they don't want Trump to have something to laugh about.

Now if Trump lowers the payroll taxes for humans and start placing some payroll taxes on robots, then at least that improves chances for humans to compete with robots, while also keep those payroll tax revenues for whatever these were supposed to pay for :-)
https://perkurowski.blogspot.com/2017/02/here-some-disorderly-lose-cannon.html

"In the long run, according to economic theory, it does not matter whether you cut payroll taxes for workers or employers; eventually wages will adjust so that the true, tax-adjusted set of wage offers ends up the same. "

Good argument against UBI

No, I think you are exactly backwards.

A UBI should be paired with a lowered minimum wage but even ignoring that, we would expect employers to lower the wages. However, they would also tend to ramp up hours. While the tax adjusted wage offer might well be the same, the number of employee hours would be significantly higher.

It's a good argument For UBI.

'and furthermore most of the time recessions do not happen'

And yet, in the long run we all experience recessions.

"In the long run, according to economic theory[...]"
HUEHUEHUEHUE

Thus why nobody outside ivory towers and wonk camps respect pseudo-science of economists.

There are two parts to the SS contribution.

The employer contribution, and the employee contribution.

I don't think Trump has in mind just cutting the employee contribution.

And, if he cuts the employer contribution, do you think the employer will pass on or pocket the mone or declare a dividend or stock buy back..

Any guesses.

The other proposal, by the way, was to index capital gains, so you know where Donald is coming with his proposals.

Employers with large amounts of low skilled employees in states with $15+ minimum wages would be tempted to restore some of the hours they have cut over the past 18 months or so.

So yes, don't cut SS contributions. We want the effects of High Minimum wage laws to be as clear as possible with nothing else muddying the water.

Dear Rat,

Any employer making a decision based on a temporary SS employment tax cut is not acting rationally...hire a new employee, knowing the tax cut will disappear soon thereafter.

Thanks for the backup Bill.

It’s not like hours can be changed week to week, it’s all or nothing. See below for my longer takedown of this Putin Puppet.

More voodoo economics from the Trump/Russian crowd. Quelle surprise.

Minimum wage has been shown to not have an effect at all on hours or employment. This is a Republican talking point that is demonstrably untrue. As Ezra Klein has said repeatedly, demand curves don’t slope down. Not for labor. You could raise the minimum wage to $25 an hour without job losses, according to many actual economics journalists with PoliSci degrees from UC Santa Cruz. It gets recycled into demand because propensity to consume is higher. It’s basically free money paid for by the 80% at the very top of the ladder. And if anything, MMT and green new deal will absorb any frivolous and unlikely job losses with a job guarantee digging ditches with shovels to transform our infrastructure to prevent climate catastrophe.

Free knowledge for the ignorant.

Anonymous. Sounds like some really interesting studies. And what better authority than Ezra Klein on how employers make decisions. He's hires a lot of people right? In the meantime, every CFO I know in the restaurant industry is trying every trick in the book to cut hours -- pick up your meal at the counter, pre-order on an app, enter your own order at a kiosk. Do anything but make me hire another cashier or runner. But I'm sure in the end that Ezra and the professors must know a lot more about this than my CFO friends ...

Damn. Just re-read the anonymous post. On the same side, sorry.

Sure go with Vox. I'll stick with the report from the CBO:

"$15 Minimum Wage Would Boost 17 Million Workers, Cut 1.3 Million Jobs, CBO Says"

https://www.npr.org/2019/07/08/739607964/-15-minimum-wage-would-boost-17-million-workers-cut-1-3-million-jobs-cbo-says

https://www.cbo.gov/publication/55410

This isn't complicated. If you raise the minimum wage beyond the local area effective minimum wage, some workers are going to have their hours cut (some to Zero). Many of those are going to be harmed.

"More voodoo economics .... . You could raise the minimum wage to $25 an hour without job losses, ...It’s basically free money paid for by the 80% at the very top of the ladder. "

Zero self awareness.

Cowen: "I am not currently expecting a recession, I just don’t see enough pointers in that direction". Business cycle contractions aren't what they used to be (did I miss the phase of the business cycle when overzealous firms expanded production and produced excessive inventory?); no, we are not in Kansas any more. The risk is a shock, resulting a major correction in asset prices: falling asset prices would cause a drop in confidence and a sharp decline in consumption. Cowen doesn't see any "pointers" for a recession. Does he see any "pointers" for a shock? They are everywhere one looks, and they are obvious, if one chooses to look. How much longer can the Fed hold up asset prices? At some point, the optimists and the pessimists will converge. That's the nature of pessimism. But I agree with Cowen about a payroll tax cut. It's just Trump signaling. To his base (a tax cut) and to his ideological soul mates (social security insolvency).

" Does he see any "pointers" for a shock? They are everywhere one looks, and they are obvious, if one chooses to look. "

rayward, why don't you enlighten us to the obvious.

Republicans historically excelled at shock creation. The good old days shook the economy with panics, depressions, panic and long depression, etc. FDR’s legacy limited shock to one Great Recession. Only social security bars Republicans from a return to the good old days.

Reacting to Japanese agrressive measures, the Korean people has decided to scrap its intelligence pact with Japan's master. Fascists shall not pass.

A payroll tax cut is a dumb idea. The funds are needed to fund medicare and SS checks. Borrowing more money is a dumb idea.

Recessions are part of the Boom & Bust cycle caused by government-based credit expansion and subsequent mal-investments in non-productive economic enterprises.
These large non-productive investments must eventually be liquidated, causing a decline in overall national economy.

Taxes (of any kind) have no direct effect on this Boom & Bust cycle -- although taxes always reduce economic productivity where applied.

Tax cuts are always a good move for the economy.

Payroll Taxes are especially nasty regressive taxes that harm low income people the most.
Payroll taxes are effectively "income taxes" -- the artificial teminology distinction is an intentional charade.

lathrop,

Ah, finallyi somebody getting at why this is not one of Tyler's better posts. This proposal is all about putting money in the hands of poorer people with the idea that they will go out and spend it, thereby propping up consumption for just long enough to get Trump reelected. Nothing long run here or whether firms are going to hire (they will if demand for their output rises substantially).

And, don't forget, the SS tax cut for the employer contribution is for the employer also, not exactly a poorer person.

Exactly. What’s a relative elasticity of demand vs supply for labor?

Sounds like a bunch of rich white cisgender male talk to me, trying to prevent the payroll tax from decreasing to oppress the masses. Economics is the ultimate excuse mongering pseudoscience, paid for by the Patriarchy (Koch’s, Mercatus Anyone??), to keep cishet white males in charge.

#FightFor$25Min

Warren/Sanders or Bust

If Not Bernie, Vote Green 2020

Payroll taxes from the employer are cut to make the employee cheaper to retain - fewer layoffs. The employees don't need it, in time of a recession, they'll stay put if they can.

@Bill

... the "SS cut" (FICA) nominally paid by the employer -- is really paid by the employee.
When an employer hires an employee -- that employer calculates how much that emploee will cost him in TOTAL ... including the supposed employer-portion of FICA. That employee's wages/salary are simply reduced by the employer FICA "contribution". It's all hidden from the employee. And most Americans are unaware of the scam.

P.S. Most U.S. employers are not "rich" and most employees are not poor or of modest means.

Most businesses are small businesses... with lots of struggling employers and Mom & Pop type operations.
Many employees make 6 figure salaries.

Dear Mil,

In the last post on this subject I listed the economic literature on the incidences of SS tax. Go to Google Scholar and type in : incidence of social security tax

The incidence turns on elasticities, just as a firm which saw a price increase for a component would pass on, rather than simply absorb, the price increase.

Finally, you call it a tax, but it is forced savings to the employee, who recovers it later, and a contribution to retirement plan by the employer. Sometimes we all recognize, as a society, that collectively we are all better off with a program which spreads risk and provides for inter temporal transfer and life planning. Its not by magic that young persons become old, but it would be magic if young persons were forever young.

At the risk of stating the obvious, if workers pay less tax, won't employers be able to hire them at a lower wage rate? In other words: there is little effective differences between a payroll tax on the 'employees side' v 'employers side'.

oh, now I see why Tyler says 'Do read the whole thing': he addresses that very point in his Bloomberg article !

I haven't read the article yet. But as Keynes explained, wages are sticky. Employees get mad if you cut their wages. Therefore, in a recession, in the short-run, employers prefer to just fire people rather than cut wages. This is why this tax trick would work. Other tricks include demand and monetary stimulus.

Every so often, Tyler predicates a Bloomberg column on something entirely ignorant (i.e., serving globalist interests and nobody else's).

Do we need more low-paying jobs so that consumers still can't afford their rent, healthcare, and education? Or do we need more disposable income? Tyler believes the former.

Squeeze that middle class, Tyler!

I thought the time-honored solution was to stimulate the demand side. But apparently we're all supply-siders now.

I don't know how long the cognitive and financial elites think they can keep this up.

Cowen, you've never run a business in your life. You hire more people when sales are going up. When sales revenue, cash flow, EBITDA, etc are up, not when your taxes go down.

https://twitter.com/crampell/status/1164560830362521600

Cowen wouldn't know a recession if it bit him in the ass.

"Only an economist..

Obama already did this. It was stupid then.

It should be focused on low salaries and/or small companies

The only problem is if you cut the employer part and crazy Bernie and faucahontas will be all over the news talking about your giving money to millionaires and billionaires.

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