Kevin Drum Completely Blows It On Payroll Tax Cut

Kevin Drum, responding to Matt Yglesias’ suggestion that a payroll tax cut would be worthwhile in the “stimulus” bill:

Agreed, but isn’t the $500/$1000 refundable tax credit in the current package essentially the same thing? Technically it’s a credit against income tax, but in practice, since it’s refundable, it’s a flat tax rebate for everyone who’s employed, which makes it roughly the same as a temporary payroll tax cut. The only real difference is that a flat tax credit is relatively more generous to the working poor than a payroll tax cut — which is a good thing — and internally it gets charged to the general fund rather than the Social Security trust fund — which doesn’t matter one way or the other. What’s not to like?

Okay, let me count the ways…

1) As a matter of stimulus, this is far from immediate. Any impact won’t be felt until at least March/April 2010. It’s not money in peoples’ pockets now, it’s a tax provision that’s pushed out into the future. An immediate cut in payroll taxes puts money in peoples’ pockets today — and being “found money” — is more likely to be spent quickly.

2) $500/$1000 isn’t that much. While he lauds it’s effect on the working poor, those of us with higher incomes paying payroll taxes are paying far more than that. Again, if you want “stimulus”, I can stimulate the economy a lot more with $3000-4000 in my pocket than I can with $1000.

3) He discounts the effect of reducing they employer’s portion of payroll taxes. If an employer can save 6% per employee (Social Security, not counting Medicare) right up front, that may make it a lot easier to keep those marginal employees on the payroll. We’re talking about a significant employer savings.

So why is a payroll tax holiday a lot better than the refundable tax credit? It’s immediate, it gets money into the economy now, it’s larger, and it helps retain jobs. None of these things are true of the refundable tax credit. So what’s not to like?

  • Miko

    Same thing that’s wrong with the overall stimulus: it’s playing around with money that doesn’t exist. We seem to have this view that it’s okay to concentrate on the extreme short term and ignore the future. If we’re going to cut government spending along with it, great. If not (note: this case is the one we’re in), it’ll help a tiny bit now at the expense of hurting a lot later.