Saturday, February 21, 2009

Payroll Tax Vacation

In the first half of his administration, the Bush Administration demonstrated effectively that a tax cut can work as a stimulus.

The caveat to such a tax-cut stimulus, though, is that a tax cut needs to be followed (at some point) with spending cuts.

I contend that part of our current economic malaise is that the Bush tax cuts were not followed by spending discipline. The markets know that taxes must rise to pay deficits.

The video below suggests a payroll tax vacation. I contend that such a vacation fails as a stimulus because businesses plan for the future. They know that the tax will return and is likely to return at a higher rate. As such it will retard future investment.

Our poor little government has piled up a massive load of entitlements and non-discretionary spending that the market knows we have all but unsolvable budget problems for the future. A conservative mechanism to stimulating the budget at the moment would be to take steps that reduce future costs or future entitlements.

There is some infrastructure spending which reduces future costs.

Obama did well by claiming that there will be a cut in deficit spending by 2013 (yahoo).

Of course, I think our economy has worn out the effect of all stimulus bills. The wild ride on Wall Street is a sign that our economy is starting to look and behave like a crack addict.


Unknown said...

Have you seen this:

y-intercept said...

The video does a great job showing how people respond to dictates ... especially when the dictates are coming from a politician who was promising a new age of enlightenment.

Hmmm, politicians and the leading elite of the nation are using a crisis to push through social policies that they want with no public debate.

One can't help but wonder to what extent the crisis was manufactured specifically to make an opening for the dictates.

Scott Hinrichs said...

I had links to both of these videos sent to me in the same email. I have already posted on the silliness of a payroll tax holiday. It would only stimulate the economy in functionally real ways if the holiday were permanent. The downside, of course, would be loss of a permanent method of funding the associated entitlements. Still, the rant in the second video is rather entertaining.

y-intercept said...

I hope I wasn't just spreading a talking point.

The problem after Bush's tax cut without spending cuts was that he reduced the term "tax cut" to buzzword status.

This clip presents tax cuts as a gimmick.

McCain's gas tax vacation proposal was a gimmick as well. We need people to get back to substance.

BTW, one can actually stimulate long term investment with a future tax cut. If the powers that be announced a capital gains tax cut that would hit in 2012, they would spur a spat of long term capital investment.

A tax vacation doesn't work because people know the taxes will rise after the vacation is over. A tax vacation might even result in divestment as people sell off investments to get the tax break.