A “bipartisan” task force recently unveiled a budget plan that includes lots of tax increases, but also has a one-year payroll tax holiday supposedly designed to boost the economy. In a debate with a former Bush Administration appointee on CNBC, I explain why this is a dumb way to try to boost growth. My Lima-beans-in-a-steakhouse analogy hopefully gets the point across, though the line about supermodels will get more attention.
Advocating Good Tax Cuts rather than Gimmicks on CNBC
November 22, 2010 by Dan Mitchell
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It isn’t that temporary tax cuts can’t have a stimulative effect, it is that this particular cut won’t.
Any tax cut (being done for stimulative purposes rather than for the otherwise good reason that taxes are too high) should (1) be directed at the taxpayers whose behavior we seek to modify and (2) be tied to those taxpayers doing what we seek.
The payroll tax holiday does neither.
Or, looking at it another way, it wouldn’t be a good idea (from a stimulative viewpoint) even if it were made permanent.
Wow! Another extremely interesting post!
At least it seems that plain logic and common sense is slowly coming back (thanks to these legislative proposals?) It seems lots of people are finally realising the obvious fact that the MORE you tax employment, the LESS employment you get.
I think there are a few good things about “temporary” tax cuts that are worth adding to this excellent video:
1) They may become permanent: If you take a look at the markets, markets think there is a decent probability that some of the Bush Tax Cuts will be extended http://www.intrade.com/jsp/intrade/trading/t_index.jsp?&page=trade&selConID=734169 and because of reason 2) they may become permanent.
2) People hate taxes because they do damage. To let tax cuts expire those in power will actually increase taxes and that helps to defeat those pro tax people in elections, I think the pro tax democrats being eager to let Bush tax cuts expire was very damaging for democrats and that helped a lot in electing republicans that may actually make the tax cuts permanent if, as markets predict, they win the Senate and the House in 2012.
3) Temporary tax cuts actually help growth, of course much less than PERMANENT tax cuts; Bush Tax Cuts actually helped growth -they were to last 8 years, a much longer time than these 1 year tax cuts- but I think the more likelihood there is that “temporary” tax cuts may become permanent the more beneficial they will be.
How costly is to FIRE a person in the USA? If the cost is low some people will actually HIRE for a year with the intention of FIRING or simply will make one year work contracts and that would increase hiring for some time at least.
Mr Mitchell showed here a video where John F. Kennedy promoted his supply side tax cuts for keynesian reasons. What is the problem with that? I think we all agree that cutting payroll taxes will somehow boost employment for supply side reasons too.
[...] Payroll tax relief – C – This proposal won’t do any harm, but it probably won’t have much positive impact because people generally don’t make permanent decisions on creating jobs and expanding output [...]
[...] tax relief – C – This proposal won’t do any harm, but it probably won’t have much positive impact because people generally don’t make permanent decisions on creating jobs and expanding output [...]