Payroll Tax Holiday is Fine, but Still a Poor Second to Real Stimulus

Today we learned that employment is still stagnant. And that the Obama administration is considering a payroll tax holiday. Our reaction should be: it's worth a try.

The Washington Post tells us that President Obama may propose a payroll tax holiday. Of what sort we do not know -- the article seems to be written by political reporters will little zeal for policy details. But, chewing this one over, we should do more than Tyler Cowen at Marginal Revolution, who simply crows with a "!" that a payroll tax holiday might be coming. Politically, it's probably a win -- how could Republicans not embrace something like that?

Let's say we lay off the payroll tax for Social Security, an idea that Sens. Orrin Hatch and Charles Schumer proposed in the NYT some time ago. You might get some more consumer spending out of this, or at least a faster march toward normal consumer spending because the cash would let people pay down their debts, the albatross around American necks these days. The payroll tax is 12.4 percent, split evenly between employer and employee and is capped at $102,000. That means, in theory, money would flow to people on the end of the income scale who are more likely to spend their money. Great.

But then we have the old conservative saw about the payroll tax: employers simply pass the full cost on to the employee, making it a tax on employment, rather than income. That may be. But if we follow this line of argument -- I would love to see an economist like Cowen do so -- doesn't that mean that employers would absorb a tax holiday into the bottom line and reduce what they pay? Would people get axed the moment it expires? If those two things are true, then you'd get less stimulus than expected. And we know where that leads: to a discrediting of the whole concept.

That we even have to debate this highlights a point stimulus advocates have been making for awhile: that straightforward government spending would be the best option. But if the best isn't available, then second- or third-best will have to do. That's where modern political life has left us.

Image from brianjmatis via Flickr
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