StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Questioning a Payroll Tax Holiday

19 Nov 2010
Posted by Bruce Bartlett

Pete Domenici and Alice Rivlin have proposed a one-year payroll tax holiday to stimulate the economy. I have previously explained why I think monkeying around with the payroll tax is a dreadful idea and won't repeat my argument here. Today, I just want to ask one question: What are the odds that Republicans will ever allow this one-year tax holiday to expire? They wrote the Bush tax cuts with explicit expiration dates and then when it came time for the law they wrote to take effect exactly as they wrote it, they said any failure to extend them permanently would constitute the biggest tax increase in history. Sadly, Obama allowed himself to fall into the Republican trap, but that's another story. My point is that if allowing the Bush tax cuts to expire is the biggest tax increase in history, one that Republicans claim would decimate a still-fragile economy, then surely expiration of a payroll tax holiday would also constitute a massive tax increase on the working people of America. And what are the odds that the economy won't still be fragile a year from now? Zero, I would say.

I respect Pete and Alice and know they are just trying, as are we all, to find something that will stimulate the economy that the Republicans will allow to take effect. But a payroll tax holiday is Pandora's Box and best left unopened. Republicans would prefer to destroy Social Security's finances or permanently fund it with general revenues than allow a once-suspended payroll tax to be reimposed. Arch Social Security hater Peter Ferrara once told me that funding it with general revenues was part of his plan to destroy it by converting Social Security into a welfare program, rather than an earned benefit. He was right.

In conclusion, the payroll tax holiday is misguided. The potential benefits are uncertain, but the dangers are not.

This

"they are just trying, as are we all, to find something that will stimulate the economy that the Republicans will allow to take effect"

This is what it all comes down to. I think many people had resigned themselves to the fact that any further fiscal stimulus would be impossible to pass and thus were counting on the Fed to pick up the slack. These same people (and many others, including Bernanke) are now surprised at the vitriol being aimed at the Fed and QE2. They're asking themselves what will happen if DC politics prevents the Fed from further action and are scrambling to come up with alternatives. There aren't any, really.


I agree. Suspending the

I agree. Suspending the payroll tax narrows the tax base rather than broadening it. Plus all the factors you mention. I am an employer (one of 3 owners of a small business) and I can state with certainty that payroll taxes have never once entered into our decisions about hiring and have not at any of my prior firms either. Perhaps they are relevant to a McDonald's franchisee where they are operating on very low margins. I doubt it even there. Employers make all kinds of rhetorical economic claims that they believe may benefit their own profitability, but the impact of payroll taxes (within reason - I am not talking about 40% but the range they have historically had in the US) on hiring compared to other macroeconomic or specific industry dynamics is extremely low. It's just not how most businesses make their decisions. Revenue drives hiring, not cost.


Sure

If a Republican is offering anything involving reducing taxes, it is ONLY that. A effort to give corporate America a gift. They long ago realized that tax cuts offer little stimulative affect. I wish everyone that writes about this would face this fact too.


But in California....

In California Republican Governor Pete Wilson provided a rebate on vehicle licence fees because of a state surplus. It passed with the explict clause stating that it the fee would be reinstated to it's proper level when the state needed the money. So now that the state is in ruins the Repulicans have honored their word and allowed and have reinstated the vehicle licence fee to it's original and proper level. It's a good thing too, becuase without those revenues the things would be really bad now...

oh oops! scratch that, it turns out that the Repulicans didn't honor their word. There does seem to be a consistent pattern here.


Payroll tax suspension

Has Bruce Bartlett ever seen a tax cut proposal he didn't hate, or a tax increase he didn't love? Seriously.


Payroll tax suspension

Do you believe in ANY taxes.

Typical conservative piss-and-moan.

Recognize that taxes are necessary and may sometimes need to be raised and fully understand and explain spending cuts you favor and maybe then you can be taken seriously.


They should use a refundable

They should use a refundable tax credit instead. Like the "make work pay" tax credit in the stimulus that Republicans called welfare. Then when it expires they won't have a problem letting it go.


Well, but what is the

Well, but what is the alternative? If the other options are even worse, wouldn't it make sense to go for it, especially since politically it at least has some chance of happening? Yes, you can worry about it being a problem LATER, but how about solving a problem you have NOW?


The old "temporary is never temporary" argument

Sometimes new spending programs and tax cuts meant to be temporary become quasi-permanent sure. Actually, many conservatives argue, especially at the state level, that tax *increases* meant to be temporary often become permanent.

But then again, many temporary programs do in fact expire as intended.

Point is, it's not safe to assume the former when there are so many examples of the latter. One of those examples is the aforementioned Make Work Pay tax credit in ARRA (and almost everything else in ARRA that is expiring...). Argue semantics if you want, but the MWP credit is effectively the same as a payroll tax holiday.

So basically Bruce is arguing that we should expect a payroll tax holiday to be temporary, when in fact we just had one that was temporary!


Social Security is a welfare

Social Security is a welfare program.

We generally prefer to raise revenues through income taxes instead of payroll taxes, because income taxes allows relevant comparisons of similarity and difference to be taken into consideration in assigning the tax burden. It seems to me that in general we'd be better off moving to a single system of tax on income rather than a tax on income and a separate tax on payroll.

The idea that Republicans would fight to avoid allowing the payroll tax back so that they could fund social security out of general revenues is an odd one. Though that would be better policy, it would almost certainly lead to our tax system and social security both being more progressive.

I'm thinking that Bruce doesn't have any idea what he's talking about, and is just doing his typical lashing out.


You may THINK Bruce is doing

You may THINK Bruce is doing what you see as typical lashing out, but he has made a claim of fact - that a GOP operative told Bruce to his face that getting Social Security on the general fund would be used to cut Social Security. It is a common assumption that funding Social Security with something other than its own dedicated income stream would make it more vulnerable. FDR insisted on making Social Security universal (among workers) and self funding, because he thought that would limit the incentive for the rich to lobbying against it.

Evidence suggests widespread concern that funding Social Security through the general fund would make it more vulnerable, whatever you (yet another budget wonk) may think.


Not really.

Social Security is a financial/economic/political stabilization effort. Nobody seems to remember the extreme economic "solutions" being proposed back in the 30s. Unemployment insurance and social security help to mitigate the destabilizing effects of the periodic crashes/panics produced by unregulated capitalism. Both provide reliable income for people who otherwise would have none. People who have lost their jobs still have some money to spend, rather than none at all, so the economy, even though hobbled, can continue to function.


You are attempting to rewrite history

Republicans certainly *wanted* the Bush tax cuts to be permanent at the time, but Senate rules required a 10 year sunset provision on any bill changing federal revenues that was not passed by 60 votes.

So the blame for the cuts being temporary lies entirely on the 38 Democrats and 4 Republicans that didn't vote for the 2001 bill and the 47 Democrats, 2 Republicans and 1 independent who didn't vote for the 2003 bill.

Saying that this was "planned" by the Republicans to be temporary all along is simply not true. The Democrats have nearly the entirety of the blame for the temporary nature of the cuts.


"Senate rules required a 10

"Senate rules required a 10 year sunset provision on any bill changing federal revenues that was not passed by 60 votes."

False.

The Byrd Rule says that when a bill is being debated under reconciliation rules (i.e. no filibusters allowed), and that bill as a whole can be expected to increase deficits beyond the timeframe of the next 10 years, any senator can if they choose lodge a point of order against any provision of that bill that would cut taxes or increase spending beyond the 10-year window. If the senator can demonstrate that (according to standards set out in the rules), the point of order is upheld & the offending provision is struck from the bill. Then it takes a 3/5ths majority to waive that point of order & get the provision added back in.

The key points are: (1) the rule applies equally to spending increases & to tax cuts; (2) it can be easily avoided if you pay for the spending increases or tax cuts you propose; and (3) if you don't have the guts to avoid it by paying for your proposals, and don't have the 60 votes needed to overcome it by waiving the point of order, you can still subvert the Byrd Rule by pretending that you expect the spending increases or tax cuts to expire in 10 years.

Republicans chose to subvert the Byrd Rule in 2001 and 2003 - the rules in no way required them to do so, but rather simply gave them the opportunity.

Follow this link for details: http://www.law.harvard.edu/faculty/hjackson/paygo_2(rev).pdf


Pete Domenici? Is that the

Pete Domenici?

Is that the Pete Domenici facing a federal grand jury investigation for his role with the Loyal Bushies in the 2006 dismissal of David Iglesias as U.S. attorney for New Mexico?

The Pete Domenici who quickly retired/resigned in 2008 after 36 years in Congress after word of this all leaked out?

The Pete Domenici who the Justice Department's Inspector General and
Office of Professional Responsibility (OPR) blasted for refusing, along with his former chief of staff, Steve Bell, and several senior Bush White House officials, to cooperate with their earlier probe of the firings of the U.S. attorneys?

Why are we taking seriously anything written or said by Pete Domenici?

Why is Pete Domenici's backside not in handcuffs?


It would work

if the holiday were only for labor and if the labor portion were replaced by doubling the corporate portion. Corporations are making lots of money these days—and they have lots of money in the bank already. They can afford to pay FICA for their employees. Employees are much more likely to spend the money and help the economy.


My you display a high degree of economic illiteracy...

...if you really think companies ultimately bear much if any of the cost of payroll taxes that don't appear as withholding on an employee's pay stub.

Companies don't care one whit if all, half, or none of federal payroll taxes "appear" to be paid by the employee or by the company. In either case, payroll taxes paid as wages or paid directly to the government are both deductible expenses on the company's tax return. If you try to "move" the employee's share to the company in order to transfer some of the company's profits to their employees, the response will simply be to lay off the least productive workers, cut pay and/or benefits, or simply reduce pay raises until the company's payroll burden is reduced to the original percentage of company revenue.

"Greedy corporation" rhetoric seems to accomplish only one thing: making those who employ it look silly when they argue for economic nonsense.


"The idea that Republicans

"The idea that Republicans would fight to avoid allowing the payroll tax back so that they could fund social security out of general revenues is an odd one. Though that would be better policy, it would almost certainly lead to our tax system and social security both being more progressive."

While I support a payroll tax holiday (and even a permanent repeal) for both economic and social justice reasons, it's not at all odd that the Republicans (who are economically illiterate and serve only the plutocrats) would agree with me.

FDR was said to have responded to a question about why he funded SS with fictitious "individual accounts" with the answer that it was so "No damn politician will mess with my Social Security plan." The Republicans have dreamed of destroying SS ever since it was created, but the fact that the middle class felt invested in the program made it untouchable. As Bruce says, they know that the first step to it's destruction is redefining it as "welfare". Welfare is for those Other People, not for Fine Hardworking Americans like you and me. Redefine it and you can start running ads about "Social security queens driving Cadillacs". (I wouldn't be surprised if they already have some in the can...)

So the question I grapple with is, how to design this economically great policy in a way that is politically tenable? I just don't know.

Oh, and Rob: the point of a payroll tax cut is not to directly affect your decisions about hiring. I agree, fine tuning taxation (of any kind) doens't do much for that. Businesses hire when they think they'll be able to sell more. End of story. The point of a PTH is to get more money into working people's hands in the most direct way possible: by taking away less of their money. That translates, in a much more direct way than any clumsy "stimulus projects", into increased spending and more sales. You would hire more people because ou'd be doing more business.


Republicans would have no

Republicans would have no problem letting the payroll tax holiday expire because the incidence would be mostly on the lower income levels. They have shown their priorities -- if top earners don't get the bulk of the benefit, they have no problem holding the whole thing hostage. For them, a middle and lower income tax cut is worse than letting the Bush cuts expire, if the top incomes aren't cut by even more.


What silly logic!

You won't credit Republicans with "caring for those with lower incomes" if they cut payroll taxes, yet you would call them "uncaring" if the ever let such an tax cut expire. No matter that such a temporary tax cut leaves those receiving it better off than no tax cut at all.

Clearly it's your ideological blinders speaking, not any real logic.

If you position had any integrity, you'd be blasting the Democrats for holding lower income taxpayers hostage when Democrats insist that they won't extend tax cuts for the "rich" as well.

Can you say "double standard"? I didn't think so.


Won't Happen

Republicans have no honor. Republicans are bullies. And republicans are working toward an aristocracy by impoverishing the 'common people' while enriching the 'chosen ones'. Of course they would not let a tax cut end now, or ever. Most of us knew this would happen when Bush was trying to pass his massive giveaway to the top 1%. It is only the low information voter, the one who pays no attention to elections but for the sloganeering they hear, mostly on FOX.


Government Debt

Dear Mr. Bartlett,

Reducing deficits is politically difficult. But is the problem the deficit or the debt? The deficit is the difference between what the federal government takes in tax revenues and what the federal government spends. The debt is means by which this difference is financed. My belief is that the problem is the debt. Reducing the debt is fairly simple, straightforward, and beneficial to the long term health of the U. S. economy. A little background will help explain this.

In 1978 Representative Augustus Hawkins and Senator Hubert Humphrey coauthored the Full Employment and Balanced Growth Act. The four goals of that act were 1. Growth in production, 2. Price stability, and 3. Balance of trade and 4. Balanced budget. Full employment is mandated by the 1946 Employment Act.

Here are links to:

Here is our trade balance (actually current account balance which includes overseas investment returns, goodwill, and a few other minor items):
http://research.stlouisfed.org/fred2/series/BOPBCA?cid=125

Here is our budget deficit
http://research.stlouisfed.org/fred2/series/FYFSD

Here is the employment picture
http://research.stlouisfed.org/fred2/series/UNRATE

And here is the consumer price index (price level)
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=CPIAUCSL&s[1][transformation]=pc1

One other chart that I am going to provide is a comparison between inflation and the unemployment rate:

http://research.stlouisfed.org/fred2/graph/?&chart_type=line&graph_id=&c...

In 1995 inflation as measured by the consumer price index was about 2.5% and the unemployment rate was about 6%. Now the inflation rate is about 1.75% and the unemployment rate is 10%. This is what bad monetary and fiscal policy looks like (the same as it looked in the 1970's). Note also, that changes made by President Clinton's Boskin commission pushed the measured inflation rate down by about 1.5% by most estimates.

The following data is from the bureau of labor statistics and the St. Louis federal reserve. From the year 2000 to present, U. S. employment for manufacturing durable goods has shrank from 10.8 million to 7.1 million, and nondurable goods manufacturing employment has shrank from 6.4 million to 4.5 million. Total employment in the production of goods has shrank from 24.6 million to 17.9 million. This represents a net loss of 6.7 million jobs. This is not a cyclical phenomenon. This is a structural change brought about by a government that has ignored principles set forth by its own members over 30 years ago.

What must change to get back to the spirit of the Humphrey Hawkins act? Starting with with number 3 price stability - to achieve price stability the auction yields on all maturities of debt sold by the government must be at least 2% above the current year over year change in the consumer price index for all urban consumers as published by the bureau of labor statistics. The federal reserve and other market players may adjust market rates as they see fit, but the federal government must never again use lower interest costs as a means to lower deficits.

Obviously, this change could lift market rates on government debt. A rise in rates on government debt could in turn lift market interest rates on private sector debt as well. If the rates on private sector debt go too high then unemployment will not fall and could instead rise. This brings me to item number 1 – full employment. To achieve full employment, the private sector after tax cost of debt service must be low. The federal government currently offers several tax breaks that allow individuals and companies to subtract interest payments from taxable income. These include mortgage interest deductions, corporate interest payment deductions, and others.

A bit of explanation is needed here. The federal government has an income stream (tax revenue) and has expenditures. Whenever the government's expenditures exceed its income stream, the federal government must finance the difference. It does this by borrowing money much like a company when it builds a new building or when an individual purchases a house. The interest rate on the debt of the federal government is the policy tool that the federal reserve uses to control inflation. Why you may ask - because unlike individuals, the federal government is always a going concern, meaning the federal government never goes bankrupt. If interest rates on government debt were 10%, the federal government would not go bankrupt, 20% the federal government would not go bankrupt, pick an interest rate and the federal government would still not go bankrupt.

Obviously the interest rate that the government pays on its debt has an effect on the interest rate that the private sector (people and companies) pays on its debt. With government bonds being rated AAA, lower grades of debt tend to have higher interest rates because of the possibility of default. That being said, one must remember that in a number of cases (mortgages, corporate bonds, student loans), the borrower can deduct the interest payments from his / her taxable income and thus realize an after tax cost of credit that is lower than the nominal rate that the individual is paying. I believe that the federal government must begin selling forward year tax receipts (FYTRs) to augment these deductions.

What is a forward year tax receipt?

Currently a corporation in the United States has three means of financing itself:
1. Current year income from sales
2. Borrow (issue bonds or tap a line of credit)
3. Issuing stock

The federal government only has two means of finance:
1. Current year income from tax receipts
2. Borrow (issue bonds or bills)

The third means of finance should be for the U. S. Treasury to accept payment in advance for taxes due some time in the future at a discounted rate. For instance, suppose the U. S. Treasury offered a 10% annualized discount for taxes paid 30 years in advance. This would mean that $1,000 paid in taxes today would cover about $17,450.00 of tax liability due 30 years from now. The U. S. Treasury would issue a forward year tax receipt (FYTR) in return for taxes paid in advance. That FYTR would be returned to the Treasury to cover $17,450.00 in tax liability 30 years from now. You may ask how this is different from 30 year bonds offering 10% interest. Here are the ways:
1. The U. S. Treasury guarantees that the 10% annualized interest on a 30 year bond will be paid back to the holder of the bond in dollars at the end of the 30 years.
The U. S. Treasury does not guarantee that the 10% annualized appreciation on a 30 year FYTR will be recovered by the holder of the FYTR. That is completely up to the
earning potential and future tax liability of the holder.
2. Unlike U. S. Treasury bills and bonds which are held around the world by foreign governments, retirement funds, etc., FYTR's would only be bought and held by individuals and /
or corporations that have a potential tax liability in the United States.

Obviously the 30 year 10% FYTR is an arbitrary example. Like Treasury bond issuance, there should be a variety of maturities with rates of appreciation that decrease for shorter maturity.

This brings me to items number 4, balance of budget and trade. While not word for word, what I am about to tell you is inspired by what the economist Abba Lerner had to say about government finance. Financing federal government expenditures should not be thought of in the same terms as personal finance. Meaning, barring a foreign invasion or a civil war, federal governments with monetary authorities don’t go bankrupt or broke. However, debt levels can matter depending on who is holding the debt.

Problems often arise in countries whose debts are denominated in foreign currencies, but the U. S. does not suffer this problem. Instead the problem the U. S. suffers from is that because of its trade imbalance, much of its government debt is owned by other countries. Countries such as China are pursuing mercantilist trade policies and recycling their trade surplus into U. S. government debt. This makes it difficult for market yields on government debt to rise to contain inflation. This is what Dr. Alan Greenspan called the bond conundrum and Dr. Ben Bernanke called the global savings glut. What this really means is that the United States spends too much and saves too little while trade surplus countries save too much and spend too little.

The normal way to rectify this situation is for the country with the trade surplus to allow its currency to appreciate. But this method is completely at the leisure of the country with the trade surplus. Another way to rectify this situation is for the country with the trade deficit to lower its private cost of capital by selling FYTR’s to the private sector, making that country more cost competitive in the global markets. This also reduces the supply of government bonds that the country with the trade surplus can buy forcing them to buy something else.

Achieving goal number 2 – growth in production then becomes easily achieved by adopting these methods.

The federal government is too often portrayed and thought of as a personal entity like “big brother” or “Uncle Sam”. The federal government should instead be thought of as a business. The federal government is a business that takes in revenue in the form of tax receipts, spends money on purposes identified by its elected representatives, and finances the difference between what it collects and what it spends with debt. The federal government, unlike any other business, does not have a profit motive. Meaning that to achieve full employment and low inflation in the United States, the liabilities that the federal government sells to the public must have a high real rate of return whether those liabilities are bonds or FYTR’s. These public sector liabilities become private sector assets. The federal government must begin selling FYTR’s to limit the amount of bonds it must sell and to lower the private sector after tax cost of debt.


Hey, Senator Bernie Sanders

Hey, Senator Bernie Sanders quoted this entry and is talking about you a lot right now on C-Span during his filibuster of tax cuts.




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