Thursday, December 09, 2010

Who gets the cut?...

I have been musing about whether the proposed payroll tax cut (SE for us farmers) would have better been targeted to the employer vs. the employee side.  Luckily,  some really smart guys are way ahead of me, as usual.
Here’s the more detailed testimony of CBO director Douglas Elmendorf. He calculates that reducing employers’ payroll taxes would increase GDP by between 40 cents and $1.20 for every dollar spent, while reducing employees’ payroll taxes would boost GDP by somewhere between 30 cents and 90 cents. On the jobs front, every million dollars spent on the employer side would create between 5 and 13 jobs in the first year; if the cuts were applied to employees, the range is between 3 and 9 jobs.
Elmendorf writes that reducing employees’ payroll taxes “would have effects similar to those of reducing other taxes for those workers”; he doesn’t go into any detail about the behavioral economics of quietly reducing withholding versus sending out splashy rebate checks.
So, let me apologize to Greg Mankiw for calling him disingenuous yesterday: there’s clearly much more of a consensus here than I thought.
I’m not yet persuaded that employer-side tax cuts are better: I still think that for three main reasons, employee-side cuts make sense right now. The experience of the last cuts shows how invisible they are and therefore how likely they are to be spent; the size of corporate cash piles shows how unwilling companies are to reinvest extra temporary cashflow; and in general employers are richer than employees, so giving the tax cut to them seems regressive. But it’s clearly credible and intellectually honest to believe otherwise.
That said, I love Elmendorf’s idea of cutting employer-side payroll taxes only for those employers who increase their payrolls. That policy would surely have a very large bang-to-buck ratio. [More]
I'm going with Felix on this one, and I also agree it was the most viable political choice.  Regardless, if you look at the analysis of the stimulative effects of the whole proposal it looks like Obama may have just negotiated his reelection.  And as several commenters have pointed out, it pretty well exposes the pseudo-concern of Republicans over the deficit.

In my conversations with farmers this week the only interest they showed was if biofuel subsidies get re-approved. This is more evidence for my conviction the only way we'll address the deficit is when we can't sell debt.

And as long as Europe keeps floundering, we apparently still look like a slightly better bet for risk-averse investors.


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Jake in OH said...

I guess my only issue with the employer vs. employee cut (i.e. trickle down vs. direct) is the theory that the money saved by employers is automatically put back into the workplace.

I can see any employer savings getting added to corporate profit, bigger bonus checks for executives, and squirreled away into the investment portfolios of that "over $250,000" crowd.

Even if the employees use it to pay down debt, that will get them closer to being the consemers they were in the mid to late '90s.