The Limits of a Payroll Tax Holiday

July 17th, 2010 at 9:48 am | 10 Comments |

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I still don’t really get the call for a (one year) payroll tax holiday.

Up until about 2000, I ran a decent sized, small (about $25-30 million in revenue, 90-100 employees) business for about 15 years. Thinking back, I can’t imagine ever hiring anyone due to the ability to avoid paying the FICA obligation on their income for a year. At that time, a sales guy worth his salt cost about $60K a year. Saving $4500 wouldn’t have been nearly enough to merit adding someone unless other factors (such as the departure of an existing rep, the possible addition of new a territory or customer base, or an overwhelming surge in demand, etc.) were in place. Even if it was permanent, it wouldn’t have been enough.

Now, I understand that a holiday ‘on the employee side’ (putting an extra $375/month in that $60K/yr guy’s pocket) would be a big deal. But if it’s only temporary, in today’s economic situation, it probably either gets saved or is used to pay down debt (both very good things in my book) rather than spent (and even if spent, it’s a short term boost, not a catalyst for self-perpetuating growth).

Of course, compared to what Obama and the Democrats want to do (basically  another AFSCME Relief Act), it’s a stellar idea.

Politics aside, what’s needed is time and patience. The systemic debt burden is simply too cumbersome (the marginal utility of a new dollar of debt is now well into negative territory) for the economy to grow organically right now. Given time, enough of that debt will be extinguished (not painlessly, of course) so that things will change.

Anything designed to circumvent that process (and I do realize our politicians know no other way) is just kicking the can down the road.

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10 Comments so far ↓

  • Shotgun314159

    “The systemic debt burden is simply too cumbersome (… bla bla bla …) for the economy to grow organically right now.”

    WOW, REALLY…
    My 16 year old says that a lot.
    With a look of blatant dripping sarcasm.

    The National Debt is a game of numbers. For CPA’s and Banksters.
    To say the beast is simply too big deal with, is defeatism.
    Yes the problem is complex.
    So what…

    Come up with a solution.

    Ya’ll bitch about conservatives not having ideas.
    Find some about the National Debt.
    I dare you…

    Shotgun

  • Shotgun314159

    The National Debt Solutions;

    A Progressive Income Tax.
    A Flat Tax for businesses large and small.
    A Scaled Tariff Tax System that protects all industries.

    I can provide specifics.
    Shotgun

  • Rabiner

    Shotgun:

    Progressive income tax: Check
    A flat tax for business: Check
    A scaled tariff tax system that protects industries: OH HELL NO! protectionism would destroy the economy and lead to quite a bit of inflation.

    And I don’t believe the author of this post was commenting so much on the National Debt but rather on personal debt. It’s hard for individuals to invest and expand business if they’re burdened with a lot of personal debt. Banks with tons of faulty mortgages are also unwilling to lend. His whole argument is a payroll tax holiday wouldn’t create jobs but sure would increase the national deficit for a given year and thus it is pointless to do so.

    And by “Check”, we already do that.

  • balconesfault

    It’s hard for individuals to invest and expand business if they’re burdened with a lot of personal debt.

    I’m not convinced this is true. But I do know that there is no incentive for individuals to invest and expand business when there is little or no demand.

    Basically there are three ways of government dealing with little or no demand in the economy:

    a) the Republican proposals – largely, cut taxes even when this increases the deficit, let people go out and spend/invest their tax savings

    b) the Obama proposals – largely, targeted government investment (via direct subsidy, tax incentives, or guaranteed purchase) in specific areas as seed money to get private investors to put more money into those areas; payments to state and local government which cannot run deficits so that they won’t lay off more people; aggressive increase in social spending to make sure people who can’t find jobs don’t go destitute and can keep spending

    c) the author’s proposals (best I can tell) – nothing. Let the cycle play out. Eventually demand will come back.

    Personally, I think that number 1 has been so discredited by the time period 2001-2008 that anyone who proposes it should be treated like a particularly dimwitted child.

    Number 3 is an answer, of sorts – but you’d better be ready to deal with massive political upheaval as the jobless rolls grow. And lots of people who have really done nothing wrong except been bitten by bad luck will suffer … badly. Just in case that matters to you.

    Obviously I favor number 2. But that’s because I believe a reason that people elect governments is to help plan for the future in ways that the free market alone won’t do. Those who believe government always screws everything up don’t like it.

  • forkboy1965

    Wouldn’t the real problem with a tax holiday be that it eventually ends… and then what? Just look at the first time home buyers credit. Once it disappeared sales plummeted. Even if a year long tax holiday put money into consumers hands (which may be saved, spent on new stuff or used to pay off credit card debt – only one of the three options actually moves the economy forward), once it ended we’d be right back to where we started.

  • balconesfault

    In my opinion, the real problem with the payroll tax holiday is that in the long run it’s just one more attack on Social Security.

  • vidoqo

    Aren’t Republicans always talking about tax cuts to incentivize business owners to hire more people, thus reducing unemployment?

  • sinz54

    balconesfault: the Obama proposals – largely, targeted government investment (via direct subsidy, tax incentives, or guaranteed purchase) in specific areas as seed money to get private investors to put more money into those areas; payments to state and local government which cannot run deficits so that they won’t lay off more people; aggressive increase in social spending to make sure people who can’t find jobs don’t go destitute and can keep spending
    Why didn’t Obama make those proposals his top priority in 2009, instead of health care reform?

    As I recall, the prevailing attitude from the Obama Administration was: “We got the stimulus package passed. Mission Accomplished. Now let’s go deal with the Really Big Issues(tm) of health care reform and financial reform.”

    In 1992, Clinton promised the voters that he would focus “like a laser beam” (his phrasing) on the economy. He kept that promise–and unemployment was reduced. Obama didn’t do that. He saw himself as Franklin Delano Roosevelt 2.0, pushing a whole slew of liberal reforms through the Congress. He forgot that Roosevelt knew that if Americans weren’t put back to work ASAP, he wouldn’t have the political capital to do anything else. Social Security was enacted in FDR’s second term, not his first.

  • balconesfault

    Why didn’t Obama make those proposals his top priority in 2009, instead of health care reform?

    Those were his top priority. That’s why the stimulus bill, that included most of those measures, was the first major legislative agenda.

    As I recall, the prevailing attitude from the Obama Administration was: “We got the stimulus package passed. Mission Accomplished. Now let’s go deal with the Really Big Issues(tm) of health care reform and financial reform.”

    First off, you are ignoring the whole automaker bailout thing, which likely saved thousands of jobs.

    Second, it seems you can’t differentiate very well between legislative agenda, and bureaucratic agenda. The administration didn’t just get the stimulus passed – it then administrated how the stimulus money was administered. Unfortunately, it does appear that liberal critics were correct, and the political decision to cut the size of the stimulus in half may put the recovery in jeopardy. Would you have been in favor of a subsequent stimulus package to reinforce the original? Of course not – so your criticism here is somewhat duplicitous, unless you have some “revenue neutral” measures that government should have taken to pump up the economy in the interim.

    Third, Obama ran on the platform that healthcare reform was a necessary long-term part of a healthy economy. For him to have healthcare reform actually kicking in during his second term, it needed to be passed during his first.

    Fourth, Roosevelt did push through a slew of liberal reforms through Congress while the unemployment rate was much higher than it is today. Hell – Reagan was slamming conservative measures through Congress while the unemployment rate was where it is today.

  • Rabiner

    Sinz54:

    You’re criticizing optics over substance it seems. Economic policies were enacted first with the Automotive ‘Bailout’, ARRA, and Home Refinancing legislation. You seem to be more upset with his decision to not speak about the economy and nothing but the economy. While you may like your President only speaking about one issue, I’ve been pleasantly surprised at his ability to multi-task on large additions.