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Buying Us Off With A Bogus Payroll Tax Holiday

mass's picture

After reading the details of the Obama/Republican tax cut deal, some Left leaning economists seemed at least not hostile to it. Yesterday morning, Jamie Galbraith skewered the President for agreeing to extend the Bush tax cuts exclusively targeting the wealthiest Americans, but by that evening, after the President announced details of the deal, he reportedly called the agreement "defensible". Brad Delong suggested the tax proposal amounted to a new stimulus, and perhaps even a "big win" for Obama, though later he conceded the plan produced "relatively low bang-for-buck".

I think what these economists like about the plan are the inclusion of a number of credits and tax cuts aimed at the middle and lower tier income earners, particularly the payroll tax holiday, something many liberal economists have been arguing for since the beginning of the financial crisis. Indeed, one of my favorite ideas for stimulating the economy is Robert Reich's proposal of exempting the first 20k in income from payroll taxes and paying for it by apply payroll taxes after the first 250k in revenue. This gets money right into the hands of those who will spend it. Of course there have been many different employee payroll holiday proposals, all of which have been shot down by the GOP, so this is seemingly a win for the administration, but something doesn't smell right here. We have a presidential deficit commission that just proposed cutting social security benefits and essentially means testing it into a welfare program, and now we have Republicans and the President agreeing to an employee social security payroll tax to be paid from the general fund. Well, what could possibly go wrong, right?

aprichard at Daily Kos sounds the alarm:

Bruce Bartlett is an economics expert, a former Domestic Policy Adviser in Reagan Administration, and a former Treasury Official during the George H.W. Bush Administration but he was also an outspoken critic of George W. Bush. He worked for Jack Kemp and was an early proponent of supply-side economics but after becoming disillusioned with Republican leaders he wrote 'Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy' and 'The New American Economy: The Failure of Reaganomics and a New Way Forward.' He is, in short, a rare example of a Republican economics expert and a straight-shooter that is not blinded by ideology. So when Bruce Bartlett says that a payroll tax holiday will undermine or destroy Social Security we should listen.

According to Bartlett:

Today, I just want to ask one question:What are the odds that Republicans will ever allow this one-year tax holiday to expire? ...if allowing the Bush tax cuts to expire is the biggest tax increase in history, one that Republicans claim would decimate a still-fragile economy, then surely expiration of a payroll tax holiday would also constitute a massive tax increase on the working people of America. And what are the odds that the economy won't still be fragile a year from now? Zero, I would say.

... But a payroll tax holiday is Pandora's Box and best left unopened. Republicans would prefer to destroy Social Security's finances or permanently fund it with general revenues than allow a once-suspended payroll tax to be reimposed. Arch Social Security hater Peter Ferrara once told me that funding it with general revenues was part of his plan to destroy it by converting Social Security into a welfare program, rather than an earned benefit. He was right.

That, in a nutshell, is the problem with negotiating with bad faith actors(putting aside for a moment whether or not Obama is also acting in bad faith). This deal, as Delong admits, gives little bang for the buck, it extends a pattern of lavishing the wealthy with generous tax breaks(including the horrendous new deal on the estate tax), and it tampers with one of the most solid government programs in the history of the nation, social security. It's a bad deal.

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CMike's picture
Submitted by CMike on

This is a disaster for Social Security. I'm still shaking my head that a lot of our MMTers think this is a good idea.

Terrific discussion by James Kwak here of the framing that might have been regarding the politics involved with extending the Bush tax cuts or not. The whole post is worth reading but here's one graf:

As I’ve said before, the Bush tax cuts were always bad policy. After the last election, President Obama will be able to accomplish precious little. But he could easily have killed the Bush tax cuts and thereby done more good for our nation’s fiscal situation than anyone will be in a position to do for many years to come. Killing the tax cuts would alone reduce the national debt by roughly as much as the deficit commission’s entire proposal. And killing the tax cuts was the path of least resistance. Obama could have done it by doing nothing. Or he could have done it by taking a strong negotiating position and being willing to walk away from the table.

And *%#!. You link to Galbraith posting the text of a two week old speech of his which I just got done transcribing myself. (Small consolation for me, I was freakishly on target with some of the punctuation.)

[Note to Lambert: It does say at the bottom: This post is adapted from a speech given on November 20, 2010 at the ADA Education Fund's Post-election Conference at the Harvard Kennedy School. It originally appeared on New Deal 2.0. i.e. on 12/06/2010]

Submitted by lambert on

The payroll tax cut will no more allowed to lapse than the tax cuts for the rich will.

The MMTers are right on the theory, and would be right on the practice if Versailles were reality based, and if we had some representation there. But it isn't, and we don't.

So, the Catfood Commission by another route, and more slowly.

CMike's picture
Submitted by CMike on

Modern Monetary Theory. Galbraith is one, or a close relation. MMTers believe that for nations which are sovereign in their own fiat currency, fiscal policy is not constrained by tax revenues or even borrowing power. Rather taxes are needed only to give the currency its value and to control inflation. The government can finance its expenditures with money created ex nihilo - from nothing. MMTers believe that the first priority of an economy should be full employment and that the government should spend whatever is necessary in excess of revenues to guarantee that metric.

Like Moneterists, Keynesians believe that the debt caused by deficit spending ultimately becomes a drag on the economy. However, Keynesians believe that during periods of relatively high unemployment and low interest rates the short-term benefits, or at least the short-term marginal benefits, of deficit spending out weigh the long term negative consequences of debt. Therefore they believe the government, when such conditions prevail in tandem, should promote economic growth by borrowing and spending in excess of revenues. The original Keynesians had no solution to the stagflation of the '70s when both unemployment and interest rates were high at the same time.

Keynesians, like Monetarists, believe monetary policy, control of the money supply and interest rates, is the more precise and faster acting economic tool to control the growth of the economy as opposed to fiscal policy which determines government spending and taxing rates. However Monetarists believe almost all government spending is inefficient compared to how the private market would allocate the money in an economy. Therefore, Monetarists believe the job of the government's central bank is to keep the inflation rate low and, with that restriction foremost, keep interest rates low enough to maximize economic growth while insisting the government always minimize its own expenditure foot print. Just as the old Keynesians have no solution for a high inflation, high unemployment economy, Monetarists have no solution for a high unemployment, low interest rate economy (which happens to be the current economic situation).

Like Krugman, DeLong is a neo-Keynesian. However, Delong has a lot more nice things to say about Milton Friedman than the Nobel Prize winner. Friedman was the reigning Moneterist for quite a while. At one time he believed that, come hell or high water, the money supply should grow at the precise rate the economy grew historically so that the market would have certainty regardless of any existing unemployment, interest, and inflation rate combination.

Margaret Thatcher stuck to that policy until she irreparably damaged her own government and proved such a policy did not work. Today Monetarists (or whatever is their preferred term for themselves) believe in more activist management of monetary policy basing decisions about interest rates on current employment and inflation rates.

mass's picture
Submitted by mass on

Thanks. I'm going to have to pull out my old economics text and ruminate on this one a bit.

CMike's picture
Submitted by CMike on

I meant to describe the '70s stagflation as a period of high unemployment and a high rate of inflation. Fed Chairman Paul Volcker's neo-Keynesian solution was to pose as a Chicago School type and choke off inflation with high interest rates before juicing the economy with low interest rates once inflation was under control. Dean Baker and other somewhat heterodox economists think Volcker went way too far in allowing the unemployment rate to rise. But I think Krugman and DeLong are all right with what Volcker did.

(Ironically, President Reagan ran high deficits due in part to his increased military spending which provided a Keynesian fiscal stimulus to the economy during the "Morning In America" period even as he railed against Keynesian/liberal economics.)

letsgetitdone's picture
Submitted by letsgetitdone on

Mass, on MMT, check Scott Fullwiler's piece here.

Also, see this piece from Randy Wray and this one from Yeva Nersisyan and Randy Wray.

Also, on SS see Stephanie Kelton here.

These pieces should get you started.

Submitted by jawbone on

doesn't take much to cause them to back off critcism of him. Gonna be interesting.

Essentially, those earning under $106K will have 2% less taken out in payroll taxes. The first stimulus tax cuts, for which Obama and Dems got little recognition from either the voters or the MCM (bcz the MCMers seldom talked about it clearly) gave $400 to each taxpayer*. For someone earning $20K, it'll come out even. For those earning under $20K, they'll come out with slightly less benefit. For those making more than $20K, they'll do somewhat better.

So, interms on money being spent, going into the economy to lead to higher demand and thus more much benefit will there actually be?

For the unemployed, for a year there will be less stress over whether Congress will extend unemployment insurance. For those beyond any unemployment insurance, there', zip, zilch. From what I can see.

BTW, I though SocSec was not allowed to get monies form the general revenue funds? But I am no expert on this, so welcome corrections/explanations. But, it seems to me, if the monies don't get into SocSec to either go out to beneficiaries or into T notes, it just doesn't get into the SS account.

Also, if Repubs see putting SocSec on gen'l revenues as a way to destroy SocSec, it is utterly clear why Obama would agree to that. Why? All together now, "Because he's a conservative?"

mass's picture
Submitted by mass on

As for how stimulative, Nancy Altman says not very:

President Obama and the Republicans will say that the payroll tax holiday is all about stimulating the economy. But don’t be fooled. According to the Center for Budget and Policy Priorities,extending the Making Work Pay Tax Credit, is a much better, more targeted stimulus. See “Payroll Tax Holiday a Poor Stimulus Idea,” available at this link.

CMike's picture
Submitted by CMike on

Social Security does not need any general revenue funds to pay out benefits according the current benefit schedules. There are surpluses in the Old Age, the Disability and the Survivor's Social Security Trust Funds. When there is a short fall between payouts and FICA tax revenues the Trust Funds will present the federal bonds they are holding to the Treasury and the Treasury is required by law to redeem those bonds, which have been earning interest, with general revenue funds generated by non-FICA taxes or by borrowing from the public.

If I get a chance I'll go over to The Angry Bear and find a post about the Disability and the Survivor's Trust Funds which will run dry in the next five to fifteen years. Bruce Webb offers updates every few months.

At that point those benefits will have to be reduced, paid for with higher FICA taxes, or paid for out of general revenues.

Submitted by lambert on

... then that's false.

However, Versailles thinks -- or at least professes to believe -- that government is like a household.

It's like the chemists are shut out of the lab, and the believers in phlogiston theory control not only the lab but the funding sources.

Or like Lynsenko.

letsgetitdone's picture
Submitted by letsgetitdone on

doesn't include any MMT folks. Not even Jamie.

And what the hell is Ezra doing in that group? What's he know anyway?

mass's picture
Submitted by mass on

...general revenue will cover the lost revenue to the Social Security Trust Fund.

Maybe the first year or two, but I think this is just a way to hasten the Social Security shortfall. No one was buying that Social Security was in dire straights 20-30 years down the road. Saying it is going to have a shortfall in 10 years might get people's attention and their willingness to "save" Social Security.

letsgetitdone's picture
Submitted by letsgetitdone on

why we have this BS about the Government ever running out of money off our backs.

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Submitted by letsgetitdone on

He cites CBOs figures for the multipliers. For reasons I've blogged about here, I think CBO's models are not to be trusted. Galbraith uses Moody's estimates here. I think these come from Zandi and Blinder.

Also, the partial payroll tax holiday, as I understand it applies only to employees, not employers. The multiplier effect for employees should be higher than the average multiplier for both, I think, because the employees are more likely to consume. Another reason why I distrust the CBO figures on this is that they give 0.90 multiplier for employees and a 1.2 for employers for payroll tax holidays. To this I say no way, Jose. It's a misprint, a botch, or a deliberate mis-estimate. There's no way the employers marginal propensity to consume or hire new employees would be greater than that of employees, most of whom have been watching every penny.

Submitted by Hugh on

The only real stimulator in all this is the extension of unemployment benefits but A) it is not a tax, B) until a couple of days ago it was a separate issue, and C) it is small relative to the other items and what the economy needs.

The two percent rebate on the FICA is problematic and depends on how it is financed. It has potential stimulative value but with inflation in commodity pricing due to the Fed's QE policies it will likely be a wash or small.

On the tax side, we are looking at big gains for the rich: the Bush tax rates are kept for 2 years, the capital gains tax is kept at 15%, and the estate tax doesn't go back to what it used to be.

Then there is a miscellany of tax credits most of which look exploitable by business so that they can get the write offs doing what they would have done anyway, or saying they are, without really doing anything for the economy.

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Submitted by letsgetitdone on

But not that QE2 will create commodity inflation. I don't think there's a chance of that happening. The Fed is just trading cash assets for other bank financial assets and those cash assets are to be used as reserves, not directly for loans. So I can't see why you think this will be inflationary.

As for the FICA tax cut, it will be stimulative. it's too small. It should be a full payroll tax holiday for employers and employees. But in any case the multiplier for that tax cut will be very good because it puts a good bit of aggregate demand into the middle class. The multiplier won't be over 1.6 as is the unemployment multiplier, but it should be in the range of 1.3 - 1.4 if I remember my data correctly.

The tax cuts for the wealthy, on the other hand, will produce little stimulus: probably only 1/8 the multiplier of unemployment payments, dollar-for dollar.

mass's picture
Submitted by mass on

the payroll tax holiday is good or not, there are far better stimulus. The point is what reducing the payroll tax for the employee does to social security politically. It leaves it extremely vulnerable.

Submitted by Hugh on

Yes and no. I have written that the Fed's buying of Treasuries is just a way for banks to charge a premium for them, but that's marginal. It's still an exchange of near value for value. It's much different from when the Fed was taking crap on to its balance sheet and paying full price for it. But the casino mentality of the markets perceives QEII as something much more substantial. So it continues to goose the markets.

That's the same thing with this Obama tax compromise. There is very little new money in it. Except for the payroll tax rebate, it is all continuations of what's already out there. As I said in my post on this, I think this won't translate into increased buying power but will be siphoned off through commodity inflation, that is people will buy th same amount but it will cost more.

Submitted by Hugh on

Going out on a limb here, but my understanding of how the FICA rebate would be financed is that Social Security's account would be credited with the equivalent of the rebate, that is the goverment would write Social Security an IOU for the rebate much as it does for Social Security surpluses.

How real this is depends on whether you think our political classes ever mean to pay off those IOUs.

mass's picture
Submitted by mass on

I'll go out on a limb as well and say they have no intention of paying it back.

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Submitted by warren mosler on

All the headline progressives continue to be the problem, as the continuously concede and now proclaim the federal deficit is indeed a long term problem.

For example, they are now criticizing the Republicans for adding to the deficit and borrowing from China to fund upper income tax cuts.

And they imply that lower deficits are a good thing, and promote their versions of getting them down over time.

Just look at what it's come to- progressives are against the most regressive, punishing tax we have, the FICA taxes.

If getting rid of FICA isn't progressive, what is?

But that's what happens when progressive can't or chose not to make the fundamentally correct argument for social security, including how federal taxes function to regulate aggregate demand and not to collect revenue per se, which means the federal deficit per se is nothing more than an accounting residual under any circumstances.

Look, we live within a regressive institutional structure. We have to over turn it just to get back towards neutral.

For example, why do govt bond traders and buyers and their associates have multi million dollar incomes, while the guy who cures cancer may make $100,000? 'True market value?' Only under our current set of institutional arrangements. How many of you know that Treasury securities once served the purpose of protecting our gold supply when on the gold standard, and have lost their usefulness and applicability ever since we floated the currency? And therefore we are allocating untold wealth to the financial sector completely in error and ignorance.

Anyway, the way forward is to start with the & deadly innocent frauds, with careful attention to the section on social security, and start fighting the battle in paradigm, and not violating Lerner's law like the pathetically inadequate headline progressives have been attempting to do, with the obviously and predictably disastrous results we are seeing.

Submitted by gob on

not economic. I find it pretty convincing: Social Security has been politically untouchable precisely because it is financed regressively. Everybody pays in at the same rate, at least up to the cutoff point, and this is perceived as "fair" by virtually every sector of public opinion, because the rhetoric says recipients are just getting back "their" money. This is a fiction, but I'm afraid it's a necessary fiction for the survival of the program, which, in case you haven't noticed, is on the chopping block.

Beauty is truth, truth beauty, but that is not all ye need to know.

letsgetitdone's picture
Submitted by letsgetitdone on

accept this argument. It might have been compelling in Roosevelt's day. But we've had SS for 75 years now, and everyone calls it an entitlement. It is an entitlement. It is an entitlement for working here, being an American citizen and contributing to our society in the way normal people do.

"The richest country in the history of the world" is rich enough to afford such an entitlement for all of us. As far as I'm concerned, SS is just part of the Government's debt to us when we reach a certain age, regardless of the nature of the contribution made into some "fund." I wouldn't hesitate a minute to remove the cap on earnings for FICA and even go beyond that to making that taxation progressive.

We don't need the money. But we do need to re-distribute wealth in order to reduce the political influence of the wealthy and keep our democracy. The excessive concentration of it brings us closer and closer to plutocracy with each passing day.

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Submitted by letsgetitdone on

about this in plenty of previous posts in the context of opposing the Catfood Commission. They decided that their best shot at blocking it was to go with a resistance based on protecting Social Security and, to a lesser extent, Medicare. Of course, they managed to generate enough noise to help block any immediate drive toward accepting deficit hawk recommendations for cuts.

However, they've gotten nowhere in advancing the more fundamental position that there is no US deficit/debt problem that has any implications for solvency of our Government. So, now here they are unable to take the position that a much more comprehensive recovery plan should be implemented by the Federal Government right now, without also promising some kind of deficit reduction plan later.

And they have no understanding that implementing such a plan later would only result in another recession that they would then be responsible for.