A Stimulus Package I Would Support
Thursday December 4, 2008
Greg Mankiw discusses a plan developed by economists Mark Bils (U Rochester) and Pete Klenow (Stanford):
I support such a plan and have been advocating that my country of Canada consider something similar, though there are logistical problems that would need to be overcome - the largest of which is the fact that the province of Quebec has their own set of payroll taxes, so an agreement would need to be reached between the Federal government and the province. A complete elimination, even if temporary, would have tax simplification benefits as well.
Since the deadweight loss of payroll taxes is rather small, relative to other taxes, it would not be my first choice of taxes to cut during 'normal' times. However, with the labor market getting softer and softer, "reducing the tax penalties... for hiring workers" is smart policy.
As part of a temporary fiscal stimulus, we would argue for subsidizing the payroll tax (employer and employee portions) out of general revenue over some sustained period, say calendar year 2009. It has some distinct advantages...Full disclosure: I know Prof. Bils from my time as a graduate student at Rochester and I have a tremendous amount of respect for him.
Like previous stimulus efforts, it has the standard demand side impact (same as cutting checks). But it also stimulates employment directly by reducing the tax penalties for working and for hiring workers.
I support such a plan and have been advocating that my country of Canada consider something similar, though there are logistical problems that would need to be overcome - the largest of which is the fact that the province of Quebec has their own set of payroll taxes, so an agreement would need to be reached between the Federal government and the province. A complete elimination, even if temporary, would have tax simplification benefits as well.
Since the deadweight loss of payroll taxes is rather small, relative to other taxes, it would not be my first choice of taxes to cut during 'normal' times. However, with the labor market getting softer and softer, "reducing the tax penalties... for hiring workers" is smart policy.
Comments
Well said. Tax what you want to discourage, subsidize what you want to encourage, “as appropriate to the situation”
It’s the part between the quotes that makes life’s dialogues interesting, don’t you think?