Wednesday, January 14, 2009

Now we're talking...

Of all the stimulus ideas offered to date, this one I like the best:
Republicans said more tax cuts were needed in the stimulus. Senate Minority Leader Mitch McConnell of Kentucky said one idea discussed during a Republican caucus lunch yesterday was a two- year suspension of the payroll tax as part of the stimulus.[More]
To be fair, I'm just one greedy taxpayer, of course (although accelerated, bonus, super-duper depreciation allowed me to postpone too much of them for next year - I'll hate myself in 2010).  But serious economists think this is the best tax cut of all.
But the centerpiece of any tax cut should be employment taxes: in particular, a permanent halving of the current 12.4 percent Social Security payroll tax on the first $106,800 of wages, split evenly between workers and employers. The direct revenue effect of that would be a bit under $400 billion per year, roughly in line with the present quantitative needs of the economy. It also meets our three tests of effective stimulus.

First, the funds would flow directly to households through higher take-home pay and indirectly through a reduction in the cost of employment. Economic studies conclude that the benefits of a reduction in the employer portion of the payroll tax are ultimately received by employees. But the immediate effect would be an improvement in the cash flow of credit-starved businesses (as well as being a marginal incentive to keep employment up).

Second, the funds would be extremely timely, with the benefits hitting the economy with the first paycheck after the plan was implemented.

Third, by lowering the taxation of labor, the plan would help produce a higher-employment recovery than would otherwise be the case.

Since the tax cut should be permanent to have maximum effect, the biggest challenge would be how to make up for the lost revenue once the macroeconomic need for fiscal stimulus had passed. In the short run, effective fiscal stimulus requires that government revenue drop, thereby enriching the private sector, and with the Treasury making the Social Security trust fund whole by way of intergovernmental bookkeeping. Longer term, however, spending cuts or a new source of revenue would be needed. [More]
More importantly, I think Obama and his economic advisers are persuadable.  Not withstanding the democratic opposition to tax cuts, this one is clearly targeted to lower-earners and can be implemented instantly.

Now all I need is a one-year capital gains holiday to sellout to Aaron and I'm golden.


Brian in Central IL said...

I wonder if the figure quoted as the shortfall takes into account the increase in income tax revenue. If you effectively cut half of the SS tax, let's use 3% to be easy, that gain in 3% of income by the tax payer would be taxed on income tax so instead of the Govt giving you a 3% tax break it really is about a 2% tax break.

John Phipps said...

Crimony, Brian: gift horse...mouth...ring any bells?

Brian in Central IL said...

I guess I am just a skeptic today, what with still having to go to work instead of getting the snow day I wanted. Although the Wife is bringing home pizza tonight.

Anonymous said...

WOW! I would start to be a little impressed if the New regime actually could do something like this! I just wish the idea came from the donkeys not the elephants (maybe it would have a better chance of gettin done).