Sunday, July 11, 2010

A payroll tax cut to stimulate the economy?

In the New York Times, former Senate Finance Committee staffer Donald Susswein writes that policymakers should enact a temporary reduction in the Social Security payroll tax to help stimulate the economy.

To stimulate the economy now with no long-term increase in government debt, Congress should therefore temporarily exempt a portion of wages from the Social Security taxes imposed on workers; at the same time, those exempted wages would not be credited in computing that worker's future retirement benefits. For example, a 40-year-old earning $50,000 and paying annual Social Security taxes of about $3,000 could see those taxes cut to about $2,000. The added $1,000 in his paycheck, along with similar amounts for other workers, could be a huge stimulus to the economy. In the future, of course, there would be a price to pay: the growth in that worker's retirement benefits would be slightly reduced — much as if he had taken off four months without pay.

I've been skeptical of payroll tax cuts as economic stimulus in the past, though I'd certainly favor them over the $800 billion or so of stimulus we did pass, which hasn't exactly seemed to jump start the economy. (Yes, I know there's a counterfactual – things could have been worse.) To the degree a payroll tax cut is "paid for," as Susswein's would be, I don't think it would be a huge problem to try it. That said, things that start out "paid for" often end up significantly less so once Congress gets their hands on them.

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