Debunking the Payroll Tax Cut Idea

DAVID FRUM

Over the past 2 years, I’ve banged the drum for a payroll tax cut as a way to put more money into workers’ hands quickly and efficiently, arguing against most other forms of fiscal stimulus as too slow and unwieldy. Bruce Bartlett states the counter-case today in the New York Times:

First, the tax cut only helps those with jobs. While many have low wages and undoubtedly are spending all their additional cash flow, those with the greatest need and most likely to spend any additional income are the unemployed.
Second, the payroll tax cut helps many workers who have no need for it and will only pocket the tax savings.
Third, economic theory and the experience with tax rebates in 2001 and 2008 tell us that people are strongly inclined to save temporary increases in income. People only increase their spending when they perceive an increase in their permanent income.
Fourth, even if one assumes that the cost of employment has declined and employers can somehow  capture some of the payroll tax cut, there’s little sign that labor costs are the principal factor holding back hiring.
The main one is a lack of sales, as monthly surveys by the National Federation of Independent Business document. In the latest survey, 23 percent of businesses said poor sales were their No. 1 problem and only 4 percent cited the cost of labor.
Another issue is whether the Social Security tax is really a tax at all. A case can be made that it is really part of a worker’s compensation, rather than a reduction of it – because the workers generally get back all of their contributions, plus more, in the form of Social Security benefits in retirement. …
To the extent that workers perceive a linkage between the Social Security taxes they pay and the benefits they receive, the Social Security system reinforces work incentives rather than being a tax on work, as is commonly believed. If this is true, then workers may well view a cut in Social Security taxes as diminishing their future benefits, which may cause them to increase their saving rather than spend the additional cash flow.