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As the clock wound down on 2010, President Obama signed into law the tax deal he struck with Republicans. One provision is a one-year, 2-percentage-point reduction in the employee portion of the Social Security payroll tax. This measure is supposed to reduce unemployment by boosting spending, but a more effective approach would have cut the employer portion of the tax.
The rationale for cutting the payroll tax on employers relies on basic economics: If the government makes it less expensive for businesses to hire workers, businesses will tend to hire more workers.
This is a straightforward statement, analogous to saying that if the government lowers the sales tax, consumers in the aggregate tend to shop more.
Some analysts argue that lowering labor costs — by reducing the payroll tax on employers — won't translate into more hiring, because businesses are already operating below capacity.
Yet this view simplistically lumps all businesses together. Even in the depths of the recession, some companies were hiring, while others were laying off workers.
After a severe recession, there is eventually a turning point when the economy begins adding jobs, on net, every month. When this happens, it's not because all of a sudden every company in the country stops shrinking and starts expanding. Rather, the turning point occurs when the growing group of expanding companies finally begins adding more jobs than are cut by the shrinking group of downsizing companies.
Giving all employers a 2% cut in labor costs would simply stack the deck in favor of the expanding companies. Even in a tough economy, expanding companies could try to win market share by slashing their own prices to consumers.
This strategy is all the more affordable when the government lowers its tax bite on wages paid to employees.
In contrast, the tax deal gives the 2% payroll tax cut to the employees, based on the Keynesian notion that what the economy needs right now is more spending. By letting workers keep a larger portion of their pretax income, the hope is they will go buy more things, which in turn will give employers reason to hire more workers.
Even on its own terms, it's not clear that giving the workers the tax cut will boost "spending" more than giving the cut to the employers. To the extent that employers would hire more workers if they had received the tax cut, those new hires would have entire paychecks in new income to spend, as opposed to the 2% increase in the take-home pay of existing workers under the actual legislation.
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Posted By: Ellman(585) on 1/10/2011 | 11:07 PM ET
Obama does not think in economic terms. He gave the tax cuts to employees to gain their vote in 2012. He extentend unemployment benefits to the unemployed to gain their vote in 2012. If we remember that Obama thinks only in terms of getting votes his policies (and inadequacies) are easily grasped. He is a political animal and an economic simpleton.
Posted By: tabrussell(1905) on 1/10/2011 | 10:46 PM ET
An interesting argument, but I disagree. Companies have been hoarding cash, so wouldn't giving employers the reduction simply give them more cash to sit on? It appears that end demand is more of a concern for companies over hiring costs when it comes to hiring decisions. Also, a one-year reduction wouldn't factor into long-term hiring. It probably wouldn't be the smartest political move to give companies the break versus workers, given the record amounts of cash on corporate balance
Posted By: dream77(265) on 1/10/2011 | 10:07 PM ET
USA recently ascended to the apex, the #1 spot for highest overall corporate tax rate in the world. Costliest place in the world to do business, and we are looking for job growth? Japan is lowering their effective corporate tax by 5% after years of applicable research...
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