Posted on 01/10/2009 8:56:24 AM PST by SeekAndFind
Despite their political appeal, $500 per worker tax credits will do very little to actually boost the economy.
We know that tax cuts are coming—the only question is what kind. Earlier this week, President-elect Barack Obama suggested that 40 percent (about $300 billion) of his proposed economic stimulus package should come in the form of a tax cut. At least half of that tax relief is expected to be aimed at helping middle- and low-income individuals. Obama advisers have begun outlining a “temporary” $500 per worker tax credit. Aside from being temporary, this Obama policy seems nearly identical to the “Making Work Pay” tax credit he supported during the campaign.
Meanwhile, many prominent conservatives, including columnist George Will and economist Larry Lindsey, are advocating a big payroll tax cut. Indeed, both liberals and conservatives favor tax cuts targeted to low-income workers that would be implemented through a change in the employer tax withholding system. While there are differences in the details of each side’s approach, a surprising degree of bipartisan support for such tax cuts has emerged.
Sadly, this new policy, despite its obvious political appeal, will do very little to actually boost the economy. What it will do is create short-term compliance headaches for millions of employers and increase the long-term fiscal burden on future generations.
We have heard many arguments in favor of the proposed tax relief. Some claim that a worker credit will give additional income to those people who are most likely to spend it. Others say that a payroll tax cut will reduce the cost of labor and the disincentive to work, and that alleviating the burden of these taxes is a quick and easy way to grow workers’ paychecks and help stimulate demand.
In terms of the politics at play, most Democrats want tax relief for low-income households, but they don’t want to replicate the failed “rebate check” strategy used by the Bush administration in 2001 and 2008. Faced with the reality that even many middle-income households do not pay any federal income tax, Democrats are trying to offset the burden of payroll taxes on low- and moderate-income workers.
However, a refundable income tax credit is still an outlay and not truly a tax cut. Furthermore, the federal government already provides a tax credit to offset the payroll tax for low-income workers. It’s called the earned income tax credit (EITC). As former House Ways and Means Committee chairman Al Ullman said of the EITC in 1975, “we are in effect rebating to the low-income groups below $6,000 most of the payroll tax they have already paid.”
There is no real evidence that a temporary tax policy change does a lot for the economy.
Republicans have been raised on the belief that a tax cut is often the best way to jumpstart a slumping economy. While they realize that proposing a cut in the tax on capital is a losing proposition, they believe that reducing the tax on workers is both politically feasible and economically advisable.
But how effective, timely, and administrable is a $500 worker tax credit or a temporary suspension of the payroll tax likely to be? Unfortunately, there is no reason to believe these tax cuts will do much to boost the ailing economy and plenty of reason to think they will wind up proving very costly down the road.
First, from the perspective of creating demand-side stimulus, this policy is identical to the failed rebate check strategy. There is no evidence that altering the delivery mechanism will result in markedly different behavior by consumers. The rebate checks that were sent out in 2008 failed to work because a significant majority of them were either saved or used to pay off debt. Given how much the economy has declined since then, workers are now even morelikely to save any tax break.
Second, the only significant difference between rebate checks from the Treasury and a change to employer withholding schedules is that the administrative burden of the tax withholding change is far more costly. Millions of employers will be forced to rush into their accounting department and implement a payroll change for more than 150 million workers. That will raise a series of awkward questions: What is the penalty for failing to make the withholding change on time? What is the impact on the self-employed? How quickly can these changes be expected to occur? What is the consequence of failing to change the system back again when the “tax holiday” is over?
Simply put, this will be an administrative nightmare. While many large employers with sophisticated payroll systems are likely to make this change with only modest costs (assuming the major payroll administration companies can implement the change for all their clients), smaller employers will face a much more difficult and time-consuming task.
Finally, while the objective of the tax cuts is to boost consumer demand and rejuvenate the economy, how likely is it that these tax cuts will be temporary? When it becomes clear that an economic recovery has begun, will Democrats really raise taxes on low- and moderate-income Americans? It’s doubtful. Therefore, the true cost of this proposal is likely much greater than the advertised cost, yet the near-term economic benefits are small at best.
Is there a better way for the federal government to swiftly deploy $800 billion and get the economy back on track? Maybe not. There is no real evidence that a temporary tax policy change does a lot for the economy. Furthermore, while a modest-sized stimulus package may be cost effective, there will be a diminishing return to any stimulus plan as it grows in size, regardless of whether the plan is implemented through tax cuts or spending increases. The current bidding is at $775 billion and the cost could rise to $1 trillion or more.
Congress would be well advised to err on the side of caution and take time to ensure that the stimulus policies being advocated are likely to work. U.S. lawmakers should focus on the most effective and most appropriate infrastructure spending. They should seek to improve those tax policies that adversely affect the most taxpayers.
Republicans have taken a step in the right direction by calling for an open and transparent process, and their calls have been echoed by Democrats. The next step is to focus on the principles of growth—including long-term growth— and to think carefully about the details, not just the sound-bites.
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Alex Brill is a research fellow at the American Enterprise Institute. He previously served as senior adviser and chief economist at the House Committee on Ways and Means.
“How much would it “cost” to eliminate personal income tax and payroll taxes for one year?”
Good question. I am guessing that it is in the $1.8 trillion range or so, give ro take a few hundred billion dollars (my guess).
Rep Louis Gohmert asked that question and realized the answer meant we could have a ‘tax holiday’ for 2 months that would cost far less than these bailouts and giveaways. That would probably be the cleanest and easiest way to pump up the economy short-term.
Of course that begs the question of whether a short-term pumping is the best or right thing. Maybe we need to get concerned about LONG-TERM economic growth. Rather than a tax holiday, the best thing to do would be pro-growth long-term permanent tax rate reductions.
Obama has learned early teh Clinton trick of abusing language to sell his programs.
A government giveaway that is run via the IRS to people too poor to pay income taxes is “a tax cut for working families”.
Obama-socialism is now marketed like Reaganomics, even though its the exact opposite. (The key is that Reagan cut marginal tax rates, while this increases marginal tax rates).
Reagan is rolling in his grave.
I'll take the $500 and buy some more ammo with it.
Good old big caliber, Made-In-The-USA brass case, re-loadable.
None of that Commie Bloc steel case, dirty powder surplus.
Only a few years ago the same amount of ammo cost about $100.
After THE OBAMA COLLAPSE it'll be $25 a round, but there won't be any for sale.
This tax cut is just welfare. Tax cuts are for those paying taxes. Payroll taxes have specified uses (retirement income and health care). The EITC already refunds a large part of payroll taxes for low wage earners. The rats want to rebate even more payroll taxes for low wage earners. Government retirement benefits are already highly skewed to low wage earners. High wage earners barely receive any more benefits than low wage earners.
These tax cuts will be a disaster. These tax cuts will substantially increase the idea that only the rich should pay taxes. The productive part of society will produce less, leading to a much deeper economic crisis.
The federal government had tax revenues of 1.16 trillion in personal income taxes in 2007 along with 870 billion in social security taxes and 370 billion in corporate taxes. Eliminating those three for a year would be around 2.5 trillion which is about the same cost as all the bailouts and proposed stimulus packages.
The federal government had tax revenues of 1.16 trillion in personal income taxes in 2007 along with 870 billion in social security taxes and 370 billion in corporate taxes. Eliminating those three for a year would be around 2.5 trillion which is about the same cost as all the bailouts and proposed stimulus packages.
My hand is sticking wide out.
In the meantime, I presume that I, a working and productive American, will pay less taxes.
I’ll take it.
Pelosi was bragging about how that was a winning issue for them. At the time I knew it wouldn't fly. Why? Bush was running huge deficits and purposefully convinced the country national debt is good, that Obama will use now. The other problem is interest rates. (I have been watching Peter Schiff) Aside from massive government deficit spending the monetary policy was print-print-print meaning savings interest rates were low while we had phony stock market and housing booms that were just paper values. So in a climate like that even honest hard working people , everybody, is likely to get sucked in and burned. And we were. Thanks to GWB we will never have privatized SS.
Yes, Obama and Pelosi are our worst nightmare. But they have power because GWB was completely clueless. And fitting the crash happened before he got out.
Are you nuts? I am a conservative-—never turn down a tax cut...they are just giving us some of our money back. This is always a good thing. Couple will get back $1000.00-income up to 250,000 last I heard.
Tax cuts are always welcome in my household. Before we feel too sorry for the truly rich-consider this...they have any army of accountants who make sure they don’t pay much in taxes. The ones who really get screwed are those between say 250 and 400,00 depending where you live-—the upper middle class-not enough to take advantage of the many tax loop-holes the rich enjoy. They always include these people when they say the top 1% pay however much of the total taxes (don’t remember)...as Warren Buffet noted, he paid less in taxes then did his secretary.
I figure you would have made your mind up on that by now.;)
I am a conservative-—never turn down a tax cut...
I never said I would turn it down, but only that it won't stimulate our economy. Maybe some other nation's who builds the stuff we'll end up buying, but not ours.
they are just giving us some of our money back.
It will probably be more Chinese money. Great deal for the Chinese. They get most of it back when we buy things that are made in China, and again when we pay the loans back.
RE :And after Pelosi got in?
I was warning freepers 2 years ago that republicans were the ones to pay for congress low approval ratings 07-08, and democrats would benefit in a second election 08 from it. So democrats had an incentive to screw things up, but GWB apparently thought he could go down with republicans, since he was re-elected, and somehow look good. The public doesnt even know it was a dem congress. winning strategy was BUSH-BUSH-BUSH and dont do much. So republicans had everything to lose, and did.
The lesser of two evils argument was not going to work again with GWB 8 years and republican congress 5-6 years.
Only one of the candidates even mentioned that the meltdown happened over the past two years, and that was Obama himself. During some of his radio messages played in the blue area I was in, he said something like “Don't ask if you are better off than you were fours years ago, but if you will be better off.” He understood the implications. Too bad McCain didn't.
I didn't say things went bad at the end of the GOP majority, but after about nine months with the Democrat majority.
“Vote Republican because the economy didn't go bad until a whole 9 months, after 5-6 years of us (+GWB) running all three branches”
I wouldn't run on that, and McCain realized he couldn't either. Unfortunately McCain had nothing to run on so he changed messages every few days. Moral? you need something positive with the negative messages.
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