Bartlett: Payroll Tax Cut Won’t Work

October 19, 2009

The always-interesting Bruce Bartlett has this piece in Forbes rejecting the idea of a payroll tax cut, being floated again as a potential part of a rumored “second/third/fourth stimulus package”:

[I]t’s clear from looking at labor markets that the problem for employers isn’t that labor costs are rising excessively, but rather that there is no demand for their output. Under such conditions, a small cut to labor costs, such as might result from lowering the payroll tax, is very unlikely to do much of anything to expand employment.

Some may argue that simply putting more dollars into workers’ pockets is good for the economy because it will stimulate spending. However, this is unlikely to be the case. First, the payroll tax cut would be temporary, and we know from experience that people tend to save temporary increases in their income. That’s why last year’s $300 tax rebate did nothing to stimulate growth.

Second, the payroll tax cut would only put money in the pockets of those who already have jobs.[…] Third, much of the payroll tax cut will accrue to those with high incomes[….]

He goes on to argue that Social Security is only a tax to the extent that contributions exceed benefits. This is an interesting argument though I don’t know how much I buy his argument that Social Security isn’t all that different from a defined-contribution individual pension program with vesting rights:

[T]he Social Security tax is more akin to a deduction from one’s paycheck for a 401(k) contribution. Although the worker loses the ability to spend the money immediately, the income is not lost because he knows he will get it all back plus interest when he retires. That is why 401(k) contributions are considered part of one’s compensation rather than a reduction of it.

For this reason, economists increasingly question whether the Social Security tax reduces employment at all.

Check out the full piece here.

Related Articles