One of the great puzzles of politics is why so many are against President Trump’s idea of cutting payroll taxes. The puzzle starts from the fact that this is simply the standard Keynesian thing to do to boost demand in a recession, and as President Richard Nixon said more than a generation ago, “We are all Keynesians now.”
The vehement reaction that has greeted this executive order to defer certain payroll tax obligations (though Trump wants to forgive them permanently if he wins the election) is over the top. Maybe an executive order isn’t quite the way to do it, and maybe too many don’t want Trump to do anything useful this close before the election. But as a piece of economic policy, it seems fine, even admirable.
That standard analysis (and this really is the way everyone’s economic models work — the Federal Reserve, the Treasury, near all investment banks, and so on) is that it is possible for an economy to suffer from an insufficiency of demand. This creates an ever widening spiral around the U-bend for the economy, and we think that’s a bad idea. The solution is for government to widen the deficit — that is, to increase the gap between what it spends and what it collects in taxes.
It’s possible to have more minor arguments about whether government building infrastructure works better than lowering taxes, sure. But then, given the amount of time it takes for government to build anything — recall Obama’s two-year search for shovel-ready projects that turned out not to exist — that doesn’t work as a solution. The demand gap is now, and we need the government action now, too.
In these terms of the standard macroeconomic models, spending more (perhaps through stimulus checks) or taxing less both blow out the deficit and create that desired demand. We should be equally happy with either, even both.
Except we’ve also got evidence from John Keynes himself. Back when he was first thinking about this, it was pointed out to him that cutting payroll taxes does exactly this: reduces taxes collected and thus expands the deficit. Further, as everyone’s paycheck gets prepared once a week (back then, now it’s usually every two weeks), it has a nearly immediate effect. The workers get a lift in their incomes to spend. Employers save on the tax costs of employing someone. It both achieves the theoretic goal and is amazingly simple to do.
We even tested it back in the last economic crisis. When the government sent out stimulus checks last time, people tended to save them or pay down debt because that’s what people do with a few hundred or a few thousand extra dollars. We’re also seeing this now: Revolving debt, which is largely credit card balances, declined at an annual rate of 65% recently. But the payroll tax cuts were spent because they were smaller and more regular amounts (amounting to the same stimulus) just turning up in those paychecks. That is, tax cuts work better at our task, increasing demand, than free money.
The Trump payroll tax cuts have theory behind them, empirical evidence, and even approval from the academic giant in the field. So, why is the proposal being greeted with such vituperation?
One answer given is that by not paying the Social Security taxes, the program’s reserves will run out. But that problem is trivially easy to solve. The British system does this already. There, people on low incomes don’t pay the tax, but they do get the pension as if they had. This level of bookkeeping is not beyond the wit of man, even of the U.S. bureaucracy.
The only actual reason I can come up with, other than political jealousy over Trump proposing something workable and sensible, is that it’s so much more fun for the politicians to spend or give away money than it is not to collect it in the first place. This may well be an accurate reflection of the priorities of our politicians, but it’s not exactly a great way to run a country.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at the Continental Telegraph.
