A tax cut to create jobs

Before the American Recovery and Reinvestment Act (the $787 billion stimulus package) was passed, President Obama’s economics team issued a report on what it thought would happen to the economy with and without this stimulus.

The recovery plan was supposed to lower the peak unemployment from about 9 to 8 percent. Unemployment just passed 10 percent.

Even though the recession may be technically over – the government just reported the economy had grown for the first time in nearly a year – unemployment is high and is likely to remain high for a long time.

This has produced pressure for a second stimulus. Given the political climate, Congress will probably do little more than extend unemployment benefits, increase social security payouts or provide more aid to states for Medicaid. The will to pass even small programs to aid recovery will probably wane more given time.

This is because of doubts about the original stimulus. Some of these doubts are unfair. It is clear that the recovery plan did not bring unemployment down as much as the Obama administration claimed it would. But this appears to be because the administration was wrong about how deeply this recession would affect unemployment.

The Republican alternatives in Congress, mostly just collections of tax cuts, would not have set unemployment on a drastically different course than it is on now. And those plans would have added less, but still a great deal, to the deficit than Obama’s plan.
Fair or not, doubts about more stimulus packages are real, and if Obama wants to push another recovery measure past Republicans and moderate Democrats, he should propose a permanent reduction in the payroll tax.

The idea comes from Greg Mankiw, a Harvard professor and former chairman of the Council of Economic Advisers for President George W. Bush. The payroll tax is what workers see deducted from every paycheck. The tax is highly regressive, falling hardest on low-income workers. It is essentially a tax on hiring and providing labor.

While temporary tax cuts do little to increase consumer spending – people just save the temporary extra cash – a permanent payroll tax would probably lead to a real increase in employment.

There are many ways revenue from the tax cut could eventually be recouped to avoid a long-term budget impact. Mankiw recommended raising the gasoline tax, which would in turn encourage people to use gas more efficiently. He called his plan the “create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.”
He proposed the plan when the original stimulus was being debated, but it could easily be used now.

It is a shame such a good idea isn’t even being considered by lawmakers.