August 16, 2022

Economix: A Targeted Payroll-Tax Cut

One of the most successful stimulus programs of the last few years has been the cash-for-clunkers program. In it, the government gave $3,500 to $4,500 to people who traded in an old car for a new one that got more miles to the gallon. If you didn’t buy a car — helping the economy in the process — you didn’t get the money.

In my column Wednesday morning, I argued for a similar approach for a new payroll-tax cut for businesses. Rather than giving a tax cut to all businesses, as the White House seems to be mulling (though the details are unclear), a targeted tax cut would reward only those business that added to their payroll. This approach does less to increase the deficit and yet could do more to promote hiring.

Michael Greenstone — an M.I.T. economist who runs the Hamilton Project, a Washington research group, and a former Obama administration official — wrote me an e-mail Wednesday morning making a more detailed argument for a targeted payroll-tax cut for businesses. It’s worth reprinting:

A better policy would be one that cuts payroll taxes for firms’ employment expansions. For example, this could be a tax credit based on total payroll exceeding last year’s payroll, some average over the last several years, or an even more complicated approach. And, one could add the condition that all hires by new firms would be eligible for the credit. Of course, there will be gaming but this will still be more efficient than the subsidization of existing employment as in an across-the-board cut (i.e., neither M.I.T. nor I should receive a credit for my continuing employment).

A targeted payroll tax cut could stop the structural unemployment rate from increasing. Specifically the longer the high levels of unemployment persist, the more likely it is that people will become permanently disconnected from the labor force, thereby raising our structural unemployment rate. At a time when we already must grapple with the high levels of debt and the long-run decline in real wages for many Americans, we should try to avoid adding to the list of our long run economic challenges….

At the same time, it is important to make a targeted payroll tax cut part of a broader package that includes deficit cuts that begin to take hold in a few years. Without this pairing, there is a real risk that financial markets will view a payroll tax cut only as a continuation of the “tomorrow” approach to dealing with the deficit.

I prefer a simple approach: Businesses would not have to pay any payroll taxes on net new employees for a few years. The policy could be backdated to June 1, so companies would not wait to hire before Congress passes the bill.

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