Posts Tagged ‘ tax cuts ’

The Government Needs to Improve the Economy

The title of this post may seem to be a no-brainer, and if it is, that’s good. Too much of the thinking in Washington at the moment is focused on the deficit and not on improving the economy. Both the economy and the deficit need work, but which is the more important and most pressing? Clearly, its the economy. No one should be complacent when we have 9% unemployment and anemic growth, but all anybody wants to talk about is the deficit which (shockingly) has nothing to do with unemployment. Sure, if we don’t deal with the deficit, at some point in the future we will have to pay higher taxes or get by with less government spending, but is that an immediate danger? Not at all.

The United States currently finds itself in the peculiar position of having an ever-growing mountain of debt and also having a lot of investors who can’t wait to buy it from us at rock-bottom rates. Under normal circumstances, as the amount that we owe increased we would have to increase the amount we payed investors (in the form of interest interest) to order to get them to buy our debt. But, thanks to a host of factors mostly out of our control (European debt crisis, Japanese economic troubles), we are currently selling our gobs of Treasury I.O.U.s for next to nothing. We are racking up tons of debt almost for free! Now, eventually the interest on our debt will rise and we will have to raise taxes and/or cut spending in order to pay it off, but for now (and probably for the next year or two) the US  deficit can increase almost without consequence.

That leads me back to my original point. Fixing the economy. The burst of the housing bubble wiped out much of Americans’ home equity and forced many into bankruptcy and foreclosure, while the stock market crash wiped out Americans’ savings and the subsequent mass layoffs left  many without jobs. As a result, Americans’ disposable income is at very low levels and that is a very bad thing in an economy that is based  70% off consumption. Without an infusion of money from somewhere, America is doomed to a slow, long slog back to good economic health.

Where could this infusion of money come from? The government of course. Robert Frank lays out the case for a payroll tax cut in the New York Times here. There is a 6.2 percent Social Security payroll tax on employees on every paycheck they receive and a 6.2 percent tax on employers every time they give their employee a paycheck. Cutting these taxes would give employees more money in their wallets which they would spend, buying things to stimulate the economy. Frank says it would also give employers more of an incentive to hire new employees since it would be cheaper for them to do so. While this is true in theory, I’m not so sure about this particular claim. Employers have been very reluctant to add to their workforce even though there are already some tax incentives to do so. Some Obama administration figures have been floating the idea of a payroll tax cut as part of the debt negotiations. This would raise the debt in the short term, but in the long-term, a robust economy is the best way to reduce the debt. And as we have seen, a short term increase in the debt is almost free (for now).

Now, I know what you’re thinking: “Republicans love tax cuts! Paul Ryan’s budget, which almost all Republicans love, proposed lowering taxes on the rich to levels not seen since before the Great Depression. Republican dogma says that cutting taxes is the best way to promote growth. Surely Republicans are the ones pushing for these tax cuts.” If you were thinking that then you are sadly wrong. Republicans aren’t in favor of all tax cuts, just tax cuts for the rich. Republicans fought tooth and nail for tax breaks for the rich in the tax cut deal they worked out with President Obama six months ago and the Paul Ryan budget includes huge tax cuts for the rich, and nothing for anyone else. Payroll taxes primarily affect the working and middle class (they don’t apply to income above about $105,000) so sources say Republicans really aren’t very interested in cutting them.

Its too bad really. The economy needs help and the government is in a position to give it help by injecting money into the economy. But, all anyone seems to want to do is take money out of the economy to fix our debt problems. Oh well.