You are hereTruthout: Subsidizing Profits, Weakening Social Security: The Employer Payroll Tax Cut

Truthout: Subsidizing Profits, Weakening Social Security: The Employer Payroll Tax Cut

-by: Dean Baker

July 5, 2011- These days, it appears as though the main goal of government policy is to give as much money as possible to corporations and the wealthy. This is an area where there has been considerable success, with the profit share of GDP at near record highs and the richest 1 percent holding a larger portion of the nation's wealth than at any point since the late '20s. The proposals for an employer-side payroll tax cut should be seen in this light.

The argument being pushed by proponents of the cut is that a temporary reduction in the employer's side of the payroll tax will give them more incentive to hire workers. This argument does not pass the laugh test, but of course, most of the things being said in elite Washington circles these days do not pass the laugh test.

As usual, the flaws can be exposed with simple arithmetic. The employer's side of the payroll tax is 6.2 percent. The argument goes that if we temporarily eliminate this tax, then it is cheaper to hire workers, so employers will hire more.

This argument depends on the responsiveness of labor demand to the price of labor. The employer tax cutters would say that labor demand is quite responsive to changes in price. However, the evidence points in the opposite direction.

Over the two-year period 1995 to 1997, we raised the minimum wage by more than 15 percent, after adjusting for inflation. There is a large body of research that shows that this increase had no measurable impact on employment. There also have been two subsequent increases in the national minimum wage as well as several increases in statewide and citywide minimum wages. The overwhelming majority of research on these hikes shows that there was no measurable impact on employment.

If we can permanently raise wages by 15 percent and see no measurable decline on employment, how can we think that a temporary reduction in wages of 6.2 percent would have a major impact on employment? Even in Washington, 15 percent is larger than 6.2 percent. A smaller change in the cost of labor cannot have a bigger effect than a larger change, and a temporary change cannot have a bigger effect than a permanent change. (If the tax cut is in place for one year, then an employer hiring in July gets the lower cost for six months.)

There are ways to make an employer-side tax cut more effective, for example by tying it to hiring new workers. However, this is a difficult one to enforce. There is enormous churning in the economy, with roughly four million people leaving their jobs and getting hired at new ones every month.

Most likely, if we restrict the tax cut to firms that hire new workers, we will just be rewarding firms for hiring that is part of this monthly churning. Of course, if a temporary 6.2 percent cut in taxes doesn't provide much incentive to hire in any case, then the consequence of making the tax cut more narrowly focused will be primarily to reduce its cost, not increase its effectiveness.



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