Screwing Up the Payroll Tax Holiday

Leave it to Obama to screw this up. You’d need to be really “educated” to blow this one.

Payroll taxes are things like FICA that are withdrawn out of our gross pay before we get our paychecks. Normally, none of us ever sees that money again.

But, it’s been suggested since the onset of the Great Recession that a payroll tax holiday might help create jobs. But, only if it reduces the costs to employers of paying workers.

Unfortunately, the Obama administration fell in a pitfall that everyone who takes principles of microeconomics learns around week 6: that the incidence of a tax is different from who you label it as falling upon.

The calculus of the Obama decision is obvious: it’s very important to them that a tax cut not go to firms. So, their decision was to not cut the payroll taxes paid by firms, but rather to allow workers to reclaim the money that the firm would pay out anyway.

This is idiotic.

A cut in payroll taxes by firms might be passed on to workers in the form of more jobs, longer hours, or higher compensation. Then again it might not. But, this is why we study tax incidence. Most importantly though, some of a payroll tax cut that went to firms might go to people who don’t currently have jobs.

Instead, Obama has given the money to people who already have jobs. If you’re already out of work, you’re SOL.