Whether it’s a trial balloon or the future of U.S. economic policy, the White House is reportedly considering two measures — a payroll tax holiday and a permanent extension of the research and development tax credit — to reduce unemployment, now stuck at 9.6 percent.
The plan — such as it is — will make for interesting politics. Republicans will have to choose to either side with the Democrats or oppose tax cuts. And Democrats will have to adopt, even canonize, Republican orthodoxy on taxes. But is it good policy? It gets mixed reviews from progressive economist Dean Baker.
Baker distinguishes between two possible payroll tax holidays. There’s a difference, he says, between giving employees a payroll tax break and giving that break to employers.
If employees get the cut, that’s money in their pockets and they’ll go spend it — almost right away. Not so if the cut goes to employers.
In textbook economics, Baker says, “the basic story is that from the standpoint of the employer they don’t care if they pay a dollar in taxes or a dollar in wages…. Payroll taxes come pretty much dollar for dollar out of wages.”
“That may well be true, but that’s not going to be true tomorrow,” Baker cautions. “You’re not going to see it in September, you’re not going to see it in October.”
Conceptually, a payroll tax holiday poses another problem: It would take money out of the Social Security Trust Fund, and would likely be cited for political reasons by people seeking to cut Social Security in the future. “if you look at the mechanics, there’s a lot of problems with cutting the payroll tax,” Baker warns. There are ways around that, though.
“It’s been my view that you can have the equivalent of a payroll tax cut in the form of a income tax refund,” Baker says. That’s basically what the administration did with its Making Work Pay tax credit — part of last year’s stimulus bill.
What about the other flank of the reported plan: the permanent extension of the R&D tax credit?
That won’t do anything, Baker predicts. Congress typically renews that every year, so making it permanent won’t change incentives.
“It’s not really stimulus,” Baker says.
