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Posted at 12:29 PM ET, 11/19/2010

Against a payroll-tax holiday

By Ezra Klein

Bruce Bartlett is not sold on the idea.

By Ezra Klein  | November 19, 2010; 12:29 PM ET
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His concern is valid. It's also 100% fixed by changing the holiday to a rebate.

Posted by: punditpending | November 19, 2010 12:52 PM | Report abuse

"But what chance is there that workers will permit employers to reap the benefits of a lower payroll tax rate? In my opinion, none. Workers will insist that they get all the benefits in the form of higher take-home pay. Consequently, there will be no reduction in labor costs for employers and no reason why this measure will reduce unemployment."

I disagree here. No chance that firms will be able to capture the benefit of a payroll tax holiday?

With 9.6% unemployment, I think it would be difficult for workers to bargain for it.

If the payroll tax cut was permanent, eventually workers would recapture the employer portion as wages are bid up, but it would be a multi-year process.

"Moreover, it's clear from looking at labor markets that the problem for employers isn't that labor costs are rising excessively, but rather that there is no demand for their output."

Average private sector weekly earnings is up 5.8% since the recession began, vs. a 3.5% increase in consumer prices, for a real increase in weekly earnings of 2.3%.

Even in a very weak sector such as construction, weekly earnings rose 6.3%.

Wages appear to move along a sticky trend, and are at least to some degree part of the problem.

"Under such conditions, a small cut to labor costs, such as might result from lowering the payroll tax, is very unlikely to do much of anything to expand employment."

It might not, but I doubt the labor demand curve is precisely vertical. The temporary nature of the cut is probably more problematic than the relative price issue. You don't staff up with permanent workers because of a one-time tax cut.

More concerning to me is pairing the payroll tax holiday with the introduction of a national sales tax.

You're basically sending people extra money with which to make durable goods purchases in advance of the tax. This could actually do quite a bit to lift sales.

Then, you take away the tax holiday and slap on a sales tax, and sales will slump.

A vastly expanded repeat of cash for clunkers or the homebuyer tax credit.

Posted by: justin84 | November 19, 2010 1:43 PM | Report abuse

Man, when did Bartlett become such a grouchy naysayer about everything? It's always "X idea sucks", but never "Y proposal would be better".

Posted by: novalifter | November 19, 2010 4:31 PM | Report abuse

There is so much bad econ in Bartlett's writeup, one doesn't know where to start. Why do historians feel qualified to write about economics? He just brushes aside marginal values and elasticities as if they were irrelevant.

Long story short, a payroll tax holiday may not be the best stimulus, but it is definitely stimulative. The Ricardian equivalence argument is a non-starter. If you give someone a check now, they do spend some of it (and in real life vs Ricardian equivalence world, it's a substantial portion)! And some of what they don't spend they use to pay down debt, which allows them to deleverage and all of us to get closer to normal. Both of these things are true for both businesses and employees, so whichever keeps the benefit of a payroll tax deduction, we're increasing demand.

Posted by: sanjait | November 19, 2010 5:08 PM | Report abuse

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