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.
Any "tax cut" the Obama Administration endorses will have as its aim the political salvation of its majorities in Congress. Therefore, it's far more likely to be a "tax shuffle" -- a rearrangement of tax policy that will allow the Obamunists to pose as generous benefactor to some large number of prospective voters -- than an actual reduction in rates.
Reply to this commentLinkReport AbuseWhat we need is a SPENDING cut. And Obama is all for "fairness," and because Federal Government employees are paid much more than private company employees for equivalent work, here is what I propose. Cut all Federal government pay across the board by 5~10%. Also, in order to be as "fair" as possible, cut the lowest levels by 5%, sliding up to a 10% cut for the highest paid (including the President). The money "saved" can be used to "create" tax cuts for business which will generate more private sector jobs. In fact, I'm so sure this will create or save private sector jobs, that the Obama economic team may want to consider making the cuts from 10~20% which would bring the salaries a little closer to what people in private industry are paid.
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