Don't Mourn for the Payroll Tax Cut

The White House has wisely, if reluctantly, given up on the idea of a payroll tax cut as part of the next Covid-19 relief legislation.

Even though we at IPI are committed tax-cutters, and have rarely if ever encountered a tax cut we didn’t like, as we have described before a payroll tax cut is a solution to a different problem. Payroll tax cuts are beneficial to people who are already working, and to businesses that are already open. They do nothing to encourage new hiring, rehiring or re-opening of businesses.

A payroll tax cut now would put a little more money in the pockets of those already working, and would thus add costs to the bill that could be better spent on much more useful provisions. Further relief measures, such as extending unemployment benefits (but eliminating the extra $600 weekly unemployment benefit), additional cash payments to families, an extension of the PPP program to businesses that have not yet taken advantage of it, would all be superior in relief terms to a payroll tax cut.

And for economic stimulus, as we have already argued, implementing immediate, full expensing of business investment would have a distinct impact, encouraging businesses to expand and lowering the marginal cost of investment capital for future investment.

Philosophically, a payroll tax cut is Keynesian in its logic: “Put more money in workers’ pockets and they will spend it and stimulate economic growth.”

Such thinking has been the curse of too many previous attempts to stimulate economic growth. That’s because putting a little more cash in people’s pockets stimulates economic ACTIVITY, but not necessarily economic GROWTH.  There’s a big difference.

The economy grows through business expansion and hiring, not just increasing the number of transactions. More money moving around is growth in the money supply, not growth in the economy. And that’s why the history of such Keynesian attempts to stimulate economic growth is dismal.

So does a payroll tax cut help people? Yes, but there are better ways to do it. Does a payroll tax cut stimulate economic growth? Not nearly as much as other options—if at all.

So let’s provide relief to those who need it and get the economy growing again. Then, if you want to talk about a payroll tax cut, we can talk.