White House floats employer payroll-tax break

Chart courtesy of Calculated Risk

In light of another disastrous jobs report, the White House is apparently considering a temporary cut in the employer side of payroll taxes as a way to stimulate hiring.

The idea, which is in preliminary stages of discussion, is among several being talked about at the White House as the economy holds center stage for the administration and Congress, the people said on condition of anonymity to discuss internal deliberations. The unemployment rate in May rose to 9.1 percent, the highest level this year.

The talks reflect the political constraints the White House is operating under with the Republican majority in the U.S. House pushing to cut federal spending. A hiring stimulus based on a tax break for employers may appeal to Republican lawmakers, many of whom have called for measures to help businesses.

It could help on the margins, but there are some downsides, which David Dayen outlines.

We?ve done hiring tax credits, we?ve done ?16 small business tax cuts,? we?ve done a number of measures over the past two years aimed at getting businesses to hire, most of which made the cost of hiring cheaper. These have not worked appreciably. The payroll tax cut in question may (or may not) be better than nothing, and their macroeconomic impact would depend on size. The two-point reduction in the employee side of the payroll tax from December 2010 cost roughly $112 billion. It was effectively a two percent raise on the first $100,000 of income. The employer-side would cost the government a similar amount if it were, say, two points, but it?s unclear where that money would go. Would businesses pocket it or use it as an incentive to hire more? Economists think the latter, but given all the other inducements tried I?m skeptical. It?s just as possible that the money will go to keeping people hired, not hiring anyone new. That?s not a bad thing but it won?t necessarily improve the employment situation.

There?s also the danger of continually cannibalizing the payroll tax cut and threatening the Social Security Trust Fund, even if there are assurances that the trust fund would be repaid out of general revenue. Once these reductions start they?re very hard to stop. [emphasis mine]

There's the major rub. Republicans have already said they will fight a reversion to the employee side of the payroll tax cut, when it's set to expire. They'd do it with this as well, as a twofer?demagoguing "tax increases" and eroding Social Security at the same time.

But there's also the reality that the economic slump is a demand-side problem?there just isn't any. And yes, it's a vicious cycle. High unemployment means lower demand, and employers won't hire until there's actually a market for their product. But it's not just unemployment driving the lack of demand. Nearly a quarter of the nation's homeowners are upside down on their mortgages and the housing market?normally a huge driver for the economy?tanks further every month.

This tax cut might help around the margins, but the downside for Social Security makes it probably not worth the effort. What the White House might want to do is reconsider whether that Senate jobs proposal is really too expensive after all.

Source: http://feeds.dailykos.com/~r/dailykos/index/~3/OPOhfTST5RE/-White-House-floats-employerpayroll-taxbreak

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