By Nick Schulz, DeWitt Wallace Fellow, American Enterprise Institute
Editor-in-Chief, American.com
David G. Blanchflower is a former member of the Bank of England’s Monetary Policy Committee. In an article in Bloomberg, he makes a powerful case for tax cuts as a way to jump start economic activity. His thinking? Companies need incentives to hire. Tax cuts that lower the cost of hiring employees are a good place to start.
One idea is to slash payroll taxes, an idea advanced by my AEI colleague John Makin who says:
“If the payroll tax (of which households pay half directly) were suspended–say, for a year or eighteen months–households would experience an immediate 3.5 percent increase in disposable income that they could employ to sustain consumption and pay down debts. Since the payroll tax is regressive, falling more heavily on lower income households, its repeal would be progressive, while transferring a substantial increase in disposable income to the low-income households who are likely to need it most and therefore likely to spend most of it.
“For firms, a reduction in their payroll tax payments would reduce their incentive to lay off workers by reducing the cost of keeping workers on the payroll. In effect, firms would be prompted to shift more toward labor as a factor of production because of a reduction in the tax on employment of labor that the payroll tax entails.”
I’ll have more to say in coming weeks about the effect of taxes on economic activity. Some of my AEI colleagues are working on papers that look at the effect of taxes on American competitiveness and I’ll be reporting some of those results soon.
Meanwhile, President Obama is in the hard-hit Midwest this week talking about job creation. A payroll tax holiday could be a bi-partisan winner.
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