Tuesday, January 26, 2010

Schumer and Hatch Propose Payroll Tax Cut

In a New York Times op-ed, Sens. Charles Schumer (D-NY) and Orin Hatch (R-UT) propose a short term cut in Social Security payroll taxes to help stimulate employment:

Here's the idea: Starting immediately after enactment, any private-sector employer that hires a worker who had been unemployed for at least 60 days will not have to pay its 6.2 percent Social Security payroll tax on that employee for the duration of 2010. The Social Security trust fund will then be made whole with spending cuts elsewhere in the budget between now and 2015. That's it. Simple to understand, and easy to explain.

The beauty of this proposal goes beyond its simplicity. Unlike a jobs tax credit of a specific dollar amount, this credit is "front-loaded" in that it provides an incentive for businesses to hire workers earlier in the year — because the tax benefit will be greater. A $60,000 worker hired on Feb. 1 will save a business about $3,400 in taxes, while that same worker hired on May 1 will save it about $2,500.

This isn't something I'd exactly oppose, but I'm skeptical of how much it would really do. Schumer and Hatch are smart to make the tax cut contingent on the hiring date – the earlier you hire someone the larger the tax cut – but since the cut remains a constant percentage of pay I'm not sure the effects here will be that large.

More broadly, hiring an employee is a long-term investment: there's a significant period of training before most employees really become productive, and I'm not sure that a short-term tax cut is enough to make employers respond. In general, permanent changes to taxes or other policies are more effective than short-term, "targeted" fixes.

Government can't effectively micromanage the economy; what it can do is create an environment in which business can thrive. While the Schumer-Hatch proposal wouldn't make matters worse, policymakers should think hard about what the best environment for employers is in terms of taxes, regulations, trade and the rest and enact policies to improve conditions for the long term.

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