The Right Time for a Payroll Tax Cut?

by Reihan Salam

Annie Lowrey of The Washington Independent comments on the news that the White House is considering a payroll tax cut:

Economists argue that spending increases tend to be more effective than tax cuts in stimulating the economy. But, the Congressional Budget Office examined (PDF) the effectiveness of a variety of tax cuts this winter, and found payroll tax cuts to be a good option, compared with, say, extending tax cuts for the wealthiest Americans. Moreover, they have positive impacts on employment — and the sustained high rate of joblessness remains the biggest drag on the American economy and a pressing public-policy issue.

I’d add only that there is a lot of uncertainty about the multipliers of public spending and tax cuts, as Greg Mankiw observed in his National Affairs essay on “Crisis Economics.”

One wonders what might have happened if we hadn’t passed ARRA and instead put in place a payroll tax cut, as recommended by Michael Boskin, or a large investment tax credit, as recommended by Mankiw.

Howard Gleckman of the Tax Policy Center has argued that we ought to “reshuffle the dollars” from the Bush tax cuts.

It seems increasingly likely that Congress will extend most, if not all, of the Bush tax cuts for at least a year or two. As the economy shows growing signs of softening, lawmakers are less and less likely to take steps that will be seen as “raising taxes.” But there is a way Congress could maintain the magnitude of the Bush tax cuts while moving around some dollars to enhance their short-term economic benefit. 

Essentially, Gleckman proposes scaling back tax cuts for higher income households and using the revenue to increase the size of the Earned Income Credit and the Making Work Pay credit.

As Annie notes, however, a payroll tax cut might prove more effective as fiscal stimulus:

According to the CBO, a payroll tax cut is about 25 to 33 percent more stimulative than providing a refundable tax credit for lower- and middle-income households, for instance.

We’ll be hearing more about this debate in the weeks to come, particular if the next jobs report is weak.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.