These days, it appears as though the main goal of government policy is to give as much money as possible to corporations and the wealthy. This is an area where there has been considerable success, with the profit share of GDP at near record highs and the richest 1 percent holding a larger portion of the nation's wealth than at any point since the late '20s. The proposals for an employer-side payroll tax cut should be seen in this light.
The argument being pushed by proponents of the cut is that a temporary reduction in the employer's side of the payroll tax will give them more incentive to hire workers. This argument does not pass the laugh test, but of course, most of the things being said in elite Washington circles these days do not pass the laugh test.
As usual, the flaws can be exposed with simple arithmetic. The employer's side of the payroll tax is 6.2 percent. The argument goes that if we temporarily eliminate this tax, then it is cheaper to hire workers, so employers will hire more.
This argument depends on the responsiveness of labor demand to the price of labor. The employer tax cutters would say that labor demand is quite responsive to changes in price. However, the evidence points in the opposite direction.
Over the two-year period 1995 to 1997, we raised the minimum wage by more than 15 percent, after adjusting for inflation. There is a large body of research that shows that this increase had no measurable impact on employment. There also have been two subsequent increases in the national minimum wage as well as several increases in statewide and citywide minimum wages. The overwhelming majority of research on these hikes shows that there was no measurable impact on employment.
If we can permanently raise wages by 15 percent and see no measurable decline on employment, how can we think that a temporary reduction in wages of 6.2 percent would have a major impact on employment? Even in Washington, 15 percent is larger than 6.2 percent. A smaller change in the cost of labor cannot have a bigger effect than a larger change, and a temporary change cannot have a bigger effect than a permanent change. (If the tax cut is in place for one year, then an employer hiring in July gets the lower cost for six months.)
There are ways to make an employer-side tax cut more effective, for example by tying it to hiring new workers. However, this is a difficult one to enforce. There is enormous churning in the economy, with roughly four million people leaving their jobs and getting hired at new ones every month.
Most likely, if we restrict the tax cut to firms that hire new workers, we will just be rewarding firms for hiring that is part of this monthly churning. Of course, if a temporary 6.2 percent cut in taxes doesn't provide much incentive to hire in any case, then the consequence of making the tax cut more narrowly focused will be primarily to reduce its cost, not increase its effectiveness.
Many of the proponents of the employer-side payroll tax cut have cited the Congressional Budget Office's (CBO) estimate of the multiplier for this policy. They point out that CBO puts the multiplier for this policy at 1.2, meaning that $1 billion in additional spending or lost revenue leads to $1.2 billion in addition GDP. That figure puts the tax cut near the top in CBO's rankings.
However, the 1.2 multiplier is just the top end of a large range that has 0.4 as its bottom. A multiplier of 0.4 would put the policy near the bottom in CBO's ranking. It means that $1 billion in lost revenue would lead to just $400 million in increased output.
A large range like this suggests that CBO sees a high degree of uncertainty on the impact of this policy. As noted, the recent research on the minimum wage suggests that the impact would be small, but there could be other factors pointing in the opposite direction.
One aspect of this tax cut that is not in dispute is that it raises important issues about the future of Social Security. And this is true whether the tax cut is on the employer side or employee side.
While the plans at present call for crediting the Social Security trust fund with the full amount that it would have received had there been no cut in the payroll tax, this is a departure from past practice in which the trust fund's revenue came entirely from the designated payroll tax or interest earned on bonds bought by the trust fund. The 2 percentage point employee-side payroll tax cut that is currently in place and any future cuts, imply that general revenue is now being used to finance Social Security.
There is nothing wrong with using general revenue for Social Security in principle, however, several Republicans have already indicated that they intend to use the revenue shortfall as an argument for cutting benefits. They may not get far in this effort, however, giving the Obama administration's openness to cuts in Social Security, it is dangerous to go down this path.
It is possible to give whatever cut is intended through a reduction in the payroll tax through an income tax cut or credit. There is no obvious reason to prefer that the cut be designated as a "payroll tax" cut, unless the point is to raise issues about Social Security. Presumably, this is why the Republicans insist that tax cuts take this form.
In short, the employer-side payroll tax cut is not only bad policy for boosting the economy; it also unnecessarily puts Social Security in jeopardy. This is one form of stimulus that we can certainly do without.
Oh that's right. There never was one.
Social(ist) Security was just another lie by FDR.
Needless to say the economy would be humming and businesses would be happy since these employees and their families are also the customers.
If more people knew this they wouldn't put up with our "big money" corrupted politicians. (both parties). We must STOP believing in trickle down. Any politician that tries to perpetuate this myth (including its variant that more tax breaks for super large corporations will create jobs) should be laughed at and booed off the stage! Also - FAIR , not free, trade is essential.
Why hasn't yours?
I'm not a CEO either.
It looks like the republican propaganda buzz word this election cycle will be "job creators." We can't do anything to upset the job creators - meaning employers. If employers are the sole job creators they are also recession creators - most recently by laying off millions of people and creating the great recession.
Employers don't create jobs just for the exercise. They capitalize on demand. When demand for their product or service increases they can hire more people. If they hire on the basis of economic propaganda or the wishful thinking of ideologues they may end up in the unemployment line themselves.
Call it the "1% solution."
We would be pumping money into the lower levels of the economy and stimluating demand for housing. Housing is still manufactured in the US, whereas iPads and other consumer goods are made in China. stimulating consumer demand for Chinese made items would stimulate China's economy not ours.
Ruinous wars, tax, trade and energy polices lead to ruin.
If not, how do you expect banks and other lending institutions to stay open?
Bank of America (one of the largest banks in the USA) offers a Growth Money Market Savings Account of .25% per year. And that's better than a basic Savings account. You can get a 12 month CD with a whopping .50% return per year.
It should be obvious to anyone with two or more brain cells that this is nothing more than a ploy to reduce costs at the expense of Government debt. Generally speaking this has been true for all supply side initiatives. Hiring and investing for productive profits are directly connected to demand. There is quite simply put no impetus to hire in the absence of demand regardless of the cost of labor. Likewise there is no impetus to invest to increase output without the demand to justify it. Another less obvious result of investment is to reduce the amount of labor required to maintain output. Thus supply side investing may result in fewer jobs and higher profits. This is what we have observed for a decade.
The President failed miserably last December in righting the economy. By continuing the ruinous Bush tax cuts he set the stage for the present debt debacle. There was NO net job creation in Bush’s first term. The tax cuts did not stave off the recession and did nothing to alleviate it. If the stimulus failed then the concurrent tax cuts also failed. To make matters worse Obama doubled down on dumb with a payroll tax cut reducing Social Security revenues. Since these were enacted the economy has faltered proving that pushing on a rope does not cause the far end to move.
We've got about 45 million people on food stamps!
There are times, of course, where tax cuts are good....but we've turned it into a religion (thanks to Grover Norquist). It should be a policy idea, not a religion.
It is always possible to outspend your increased income.
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200
Gov't revenues in 2010 = 14.9% of GDP
So, are Gov't revenues functionally more or less? Looks like less to me.
The population is 80million more in 2010 than in 1980 - so the total $$ has to be bigger.
The % of GDP is a few columns over in your referenced document.
So we are fast approaching the point where SS is very dependent on revenues from the general fund.
I agree with Dean. These cuts are the slow motion death of SS.
If the administration wanted to give a tax break to workers they could have done this differently. They chose to provide the stimulus via FICA taxation. They must have understood when this was first agreed that this was a slippery slope that would be tough to reverse.
Does that mean that the Admin is actually aware that SS is a time bomb and wanted to defuse it by making it (more) uneconomical? To force the issue?
I would love to know what they are thinking. If they actually were thinking that the cuts would only be for a year and things would return to "normal" they have blundered in a very big way.
Funny that the left might actually be the death of SS. Those that want it dead must be laughing in the aisles. I am.
$20 trillion - amount of wealth held by the top 1% = 35% of $58 trillion total personal wealth
$20 trillion - income of top 1% = 25% of $83 trillion total personal income
These 1% represent about 1.4 million individual and household tax filers. If the deficit is $1.2 trillion then a mere 1 1/2% tax on this $40 trillion would generate enough revenue ($600 billion) to cover half of the deficit. The other half could easily be generated by cutting the egregiously wasteful pentagon budget, unneeded subsidies to large, hugely profitable, corporations, transaction taxes on Wall Street and commodity speculation, and closing of corporate loopholes that allow them to avoid taxes altogether.
also, fanned for rational thought
If the average person knew the actual extent of income and wealth disparity in this country, they would be protesting in the streets to throw out all politicianÂs (even most Democrats) that are now talking about cutting more from the middle class (Medicare, Social Security, etc.) and services for the needy, old , sick, and very young. Here are some numbers (rounded for simplicityÂ):
$20 trillion - amount of wealth held by the top 1% = 35% of $58 trillion total personal wealth
$20 trillion - income of top 1% = 25% of $83 trillion total personal income
These 1% represent about 1.4 million individual and household tax filers. If the deficit is $1.2 trillion then a mere 1 1/2% tax on this $40 trillion would generate enough revenue ($600 billion) to cover half of the deficit. The other half could easily be generated by cutting the egregiouslÂy wasteful pentagon budget, unneeded subsidies to large, hugely profitableÂ, corporatioÂns, transactioÂn taxes on Wall Street and commodity speculatioÂn, and closing of corporate loopholes that allow them to avoid taxes altogetherÂ.
Before you repeat this, I must tell you I made an error on the income figures.
The top 1% made $2 trillion (not $20 t) = 24% of $8.3 trillion (not $83 t)
The wealth figures are accurate, however
sorry about that,
martman
Tax the Wall St casino and favor production and innovation, with tax and tariffs on outsourcing and offshoring.
It is idiotic to dwell on this misdirected diversion while gifted trillions sit hoarded or drive up life's necessities. It is pure exploitation to freely offer more hard earned equity up to embedded despots.
Even you, Baker are getting bogged down in their trojan horse of details and ignoring ridding Washington of these 1eeches.