Please don’t do it on the employer side of the payroll tax

One never knows how much to make of reports claiming to know what will be in the president’s jobs package. Some of them, like this Bloomberg story are saying that the president may propose a holiday on the employer side of the payroll tax in addition to continuing the 2 percent payroll tax holiday on what employees pay.

The Bloomberg story says, “Almost half the stimulus would come from tax cuts, which include an extension of a two percentage point reduction in the payroll tax paid by workers due to expire Dec. 31 and a new decrease in the portion of the tax paid by employers.”

An employer-side payroll tax holiday does not make sense on either economic or political terms and should not be pursued. We need jobs, so how does giving an employer a rebate on payroll taxes help? Since the rebate is on taxes paid for all workers, which is primarily current workers and not newly hired workers, this short-term, temporary policy amounts to just giving employers cash for doing what they do now, i.e., for doing nothing. Now, firms already have a ton of cash, as the Wall Street Journal recently reported:

“Non-financial companies in the Standard & Poor’s 500-stock index were holding $1.12 trillion in cash and short-term investments in their most recent reports, up 59% from $703 billion in the third quarter of 2008. Those stockpiles are providing companies with a cushion of comfort amid the economic and market turmoil.”

In fact, isn’t that how the problem is frequently stated, that firms have a lot of cash but are not investing or hiring? So, giving them more cash doesn’t solve that problem, right? Maybe some people think a payroll tax holiday for employers works by lowering the costs of hiring new workers. If so, then it would not make sense at all to lower the taxes paid for workers already employed, a clear waste of money. That is why some people, including yours truly, have noted that lower taxes for employers should only result when employers add more workers than they already have, such as in a new jobs tax credit (see this EPI briefing paper). This policy has some serious leakage, too, as many firms would be adding employment anyway, but the overall impact is cost-effective and could encourage hiring now rather than later.

It is worth noting that providing a payroll tax holiday on the employee side has a totally different economic rationale and one that makes sense. Basically, less payroll taxes paid means a fatter weekly take-home paycheck which, in turn, means households will be spending more. This boosts the overall demand for goods and services and generates jobs throughout the economy. In 2011 the payroll tax holiday boosted spending enough to offset the negative impact of higher fuel prices on family budgets.

What about the politics? One can understand that conservatives might want to have a payroll tax holiday on the employer-side since, let’s face it, they like to give cash to corporations. So, why should President Obama propose this? Let the political opposition make that proposal. Then again, I haven’t frequently understood the theory underlying the president’s tactics in policy negotiations or how bargaining with yourself pays off in better policy or more political support.

  • Hendrik Van den Berg

    Overall, good points.  But I don’t think halving the employee contributions makes much sense either.  It benefits relatively rich workers much more than the increasing numbers of poor workers.  Personally, I am one of those slated to gain the most since I am right around the maximum social security contribution.  The money goes straight into my bank account where I barely notice it.  Rather than spend more, by default more will goo into my savings or investment accounts by default.

    I would urge a program whereby the government is the employer of last resort.  For much less than the total cost of $447 billion of this program (probably something on the order of $300 billion) we could have the government employ, or subsidize the employment of, every unemployed person in this country.  Yes, that would the role of the government in the economy.  And why not? 

    • Jlp2258

      Why not? There should be NO employment of last resort.  That’s part of the larger problem now – workers will not accept a job that’s available due to the government paying them not-to-work. 

      While, I too, am within the max SS earnings, but I do put those non-taxed dollars back into the economy.  Either through direct purchase or investment.  Granted, I do not see an employer “tax holiday” (such an odd combo term) as doing anything to stimulate hiring on any large scale.  So, give the “tax holiday” to the employee because the bulk of that money will be spent – not saved nor invested.

      I do take issue with your classification of my earning level as being “relatively rich”.  Hardly!

      • MarkJ

        It is fine to disagree, but it is dishonest to make a claim that someone would know the motive or circumstance of every worker that does not have employment at this time.

  • I am so sad that “liberals” don’t recognize the payroll tax holiday as a death knife aimed at social security, because (a) as recent events re bush cuts show, almost impossible to rev a holiday, and if we don’t reverse it, soc sec funding in big trouble if we make up money out of genreal rev, this breaks the historical political support for this program as not based on transfers….

    I wish just one of you liberal econ guys (krugman thoma delong galbraith mishel etc etc) would come out and squarely address this point