Guess what costs $800 billion? A 1-year payroll tax holiday

The "Obama" stimulus package that today passed in the U.S. House of Representatives has a price tag of $789,000,000,000. Did I miss any zeroes?  789 billion with a b, almost a million million.

To the President's great credit, the bill is especially impressive for what it does not do. It does not contain the false promise of trade protectionism. As for what it does do, a major component is a cut to payroll taxes which will add roughly $13 to the paycheck of every working American. I and many others have called for that kind of policy, and I think it will help stimulate aggregate demand.

What's amazing is that much of the rest of the bill's stimulus does not actually enter the economy until 2010, 2011, 2012 ... you get the idea. Even if you believe in government expenditures as stimulus - and I do not - the timing problem is not solvable.

So guess what else 800 billion dollars could pay for? The total revenues from all payroll taxes in a single year, by eerie coincidence, equals just $800b (of course, that's in measly 2008 dollars). The bulk of that is $566 from the Social Security payroll tax (OASDI). There's another roughly $200b in revenues from the Medicare tax (HI). Plus the $43b in receipts from the unemployment insurance tax (the one that taxes people who create jobs).

Just in case there is a need for a stimulus 2.0, let's keep this in mind. The Congress could offer a 1-year payroll tax holiday, giving employers a 7.65% reduction in the cost of labor (a little bit more, actually), AND workers a 7.65% higher paycheck (for their first $100,000 in wages). You could argue the elasticities of labor supply and labor demand differ, so that the feedback would be weighted more toward paychecks or employer cost, but so what? It would be an immediate stimulus. It would go to working Americans. And it would sail through with bipartisan support. 

But then, well, we would still have to fix the banking system. It's all funny money until that gets done.

Comments

[pmp]

Dumb question (and now a moot one): when we talk about a payroll tax holiday, exactly which taxes would we temporarily repealing?

Is it just FICA which, as I understand it, is 6.2% each on employee/employer side? Or also the 1.45% Medicare tax? Or even more?

I've been trying to get away from calling it a tax cut and phrasing it as "an instant raise of XX% for everyone who works" but that phrasing is troublesome b/c we don't know exactly how much of the employer "contribution" would go to bidding up wages...

[Tim Kane]

pmp,

A full holiday would be split between employer and employee. The immediate effect would be 7.65 or 8% salary increase in each paycheck, of the first $100k a worker makes. For example, if Eddie makes $1900 bi-weekly, with take-home pay of $1400, then he would get a "raise" of roughly $150 in take-home pay. His employer would also pay $150 less in costs for Eddie. Now, over time, the pile of $300 may shift towards the employer in terms of deferred real raises, or in the aggregate sense of lower hiring wages. But it still means removing the tax wedge on employment, so a net plus for job creation.

[John Thacker]

It would go to working Americans. And it would sail through with bipartisan support.

Really, sail through with bipartisan support? Then why did no Democrats support Senator McCain's proposal to cut the FICA tax in half for one year?

http://thomas.loc.gov/cgi-bin/bdquery/z?d111:SP00364:

[kahunabear]

You are exaclty right. We are too stupid to keep it simple.

[Lisa Heather]

The package provides a credit of up to $400 per person ($800 per family) against their 2009 and 2010 taxes. My payroll software, Payroll Mate is providing 2009 users the payroll updates for free. For those businesses who are still doing payroll by hand or a looking for payroll solution, I recommend visiting http://www.realtaxtools.com.

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[Pat]

Are you trying to make the point that instead of bailing out banks and corrupt institutions that are responsible for this mess, we could cut the payroll taxes of all workers for a year for the same cost? This is a great idea to put more money in workers pockets, especially the lower and middle classes, but payroll taxes fund Social Security, which is already paying out more than it takes in, so Social Security would go further into debt. However, the majority of Americans pay more in payroll taxes than they do in federal income taxes, so this would be a huge SHORT TERM benefit to all workers.

But what happens to the things taxes pay for? If you cut payroll taxes, how do you pay for social security? If you cut local taxes, how do you pay for roads, schools, etc? If you cut federal income taxes, how do you pay for the military adventurism and federal programs? Tax cuts mean nothing without spending cuts. (Actually they are worse, because then spending is repaid with interest in the future)

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