Forbes – Leadership: Three Reasons To Be In Favor Of A Payroll Tax Cut

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For at least a few moments this week, President Trump suggested a payroll tax cut to stimulate the stalling macroeconomy. Although it appears that he has already changed his mind, it’s worth taking a look at the strategy…just in case.

Let’s say for sake of argument that the negative signals we have received of late are accurate. What should we do if we slip into full-fledged recession? Cut interest rates? Lower the budget deficit? Decrease payroll taxes? It turns out that the last one is the clear and easy winner. Why?

1. People and businesses just don’t care that much about interest rates.




Study after study has shown that businesses in particular are not moved by changes in interest rates. Think about it: do you run out and buy that big-screen TV because the financing rate dropped from 12% to 10%, or because you got a raise? Naturally, you’d rather the rate you paid on cars, homes, appliances, etc., were lower than higher, but empirical studies show–not surprisingly–that more money in your pocket is by far the bigger motivator. The President is dead wrong regarding his prediction that if the Fed were to cut rates, the economy would suddenly boom. Remember how it boomed when they fell to almost zero after the Financial Crisis? Oh yeah, it didn’t.

2. A tax cut puts money in your pocket that you will spend.

THIS spurs economic activity and would be far more effective than monetary policy. Personally, I’d prefer a spending program over a tax cut, but when the President has a good idea he should be encouraged to hold on to it! Don’t just make it cheaper for people to borrow, give them more money to start with. There is no question this would boost the economy.


3. A public sector deficit is a private sector surplus.

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Some worry, however, that such a move would raise the deficit and drastically increase an already booming federal government debt. It just might, and who cares? By definition, a public sector deficit MUST be a private sector surplus . Think about one of the consequences of that inescapable accounting identity: if the government taxes more than it spends, then they drain out more income than they inject. We are net losers. This is why, when the the government started worrying about balancing the budget during the Great Depression, unemployment leapt from 14% (down from a high of 24.9%) to 19% in a single year. Of course it did. Nor is default even a possibility, as I have explained at length elsewhere. We do run the risk of causing inflation as we reach full capacity, but then that’s why you stop stimulating the economy at that point! Your car tire doesn’t explode when you put air in it because you reach your goal–and stop adding air–long before the pressure exceeds what it was engineered to withstand.






In short, a payroll tax cut would indeed be an effective strategy were we to slip into recession. However, as changes in strategy occur in the White House even faster than the turnover in their personnel, who knows if this was ever a serious suggestion?

Buying Greenland doesn’t help, by the way.

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Source: forbes.com

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