The Magazine

Cut the Payroll Tax

It's the real pro-growth measure.

Oct 26, 2009, Vol. 15, No. 06 • By MATTHEW CONTINETTI
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Democrats see the job market and have to concede that what they have wrought isn't good. Unemployment has risen to almost 10 percent despite the huge stimulus bill enacted last winter (and the smaller bipartisan stimulus of early 2008). Democratic leaders are slowly discovering that the economy isn't some old jalopy you can jump-start with a few expert tweaks to the sputtering engine. They are realizing that no jobs and no growth spell trouble for their plans to turn America into a large version of Sweden.

And yet the Democrats are doubling-down on their tax-and-spend agenda. In a hole of their own creation, they're digging furiously away. They keep returning to their -theory that Beltway politicians know how to micromanage the economy. They seem convinced that the best response to the stimulus's weaknesses is--we are not making this up--another stimulus. The evidence suggests otherwise.

Last week the White House released figures showing that, so far, $16 billion in obligated stimulus contracts have bought the country a total of 30,383 new jobs. This is far below what the administration had hoped and claimed. Each new (temporary) job, probably paying on average less than $50,000 a year, has cost taxpayers $71,500. It turns out that "cash for clunkers" is a pretty good description of the stimulus overall. No wonder people don't think it's working. No wonder there's public opposition to plunging the country further into debt in the pursuit of such meager gains.

Another group of congressional Democrats wants a temporary tax credit for companies that hire new workers. The credit, in one proposal, would apply to 15.3 percent of the cost of a new hire in year one, 10.2 percent of the cost in year two, and then it would disappear. Before it vanishes, though, the credit would generate all sorts of market distortions. Depending on the final legislative language, it might disproportionately benefit market incumbents rather than start-ups. Some companies might try to get the tax break by simply shifting part-time workers to full-time employment, which would do little to improve the job market.

And like most bad ideas, this one has been tried before. Jimmy Carter included a similar credit in his Tax Reduction and Simplification Act of 1977, and it didn't work. "The impact of the credit on jobs was slight," Emil M. Sunley wrote in his 1980 study of the Carter bill. "In many firms those who make hiring decisions did not understand the firm's tax status. In addition, some time passes between the employment decision and the determination of eligibility for the credit." In other words, by the time employers caught up to Washington's idea-of-the-week, the economy had already moved on.

The good news is that some Democrats and Republicans are taking a second look at a real pro-growth measure. Something simple. Straightforward. Not gimmicky. A payroll tax cut.

The payroll tax hits 60 percent of Americans, including anybody who runs a business. Cutting it would be fast, easy, and effective. Where a tax credit is complicated and invites rent-seeking, a tax cut is transparent. Last December, AEI's John H. Makin calculated that if the payroll tax were suspended for 12 to 18 months, personal discretionary income would rise by 3.5 percent. Workers would have fatter paychecks to spend. The increase in consumption would spur demand. Meanwhile, since the payroll tax also hits employers, a reduction would lower the cost of hiring additional workers. Another way to go would be not to suspend the tax, but to reduce it--permanently.

The main objection to a payroll tax cut is that it would cost the government money. True, but so would any of the other schemes being bandied about. And the deficits those plans would produce are far less likely to result in economic growth. They would buy us little for a lot. By contrast, the deficits resulting from a payroll tax cut would buy us more consumption and more jobs.

Rising joblessness has soured the public on Obama and the Democrats. Their response? Another visit to the empty refrigerator of liberal economics. Sounds to us like an excellent opportunity for conservatives to display some political imagination, put together a bipartisan coalition for a payroll tax cut, and help rescue the economy.

The political benefits wouldn't be so bad, either.

--Matthew Continetti