Let's assume Democrats and Republicans team up in the next few weeks to pass a very GOP friendly debt reduction bill. And let's stipulate, too, that, as in Britain and elsewhere, the spending-cut magic doesn't do anything to help the unemployment crisis, leaving President Obama and the Democrats a huge political liability -- and national problem -- they won't be able to resolve by election time in November. This is why they're trying to squeeze something -- anything -- into the debt ceiling package that will provide near-term stimulus, to improve the jobs situation or at least counteract the austerity measures. Unfortunately, Republicans have foreclosed on the highest-impact ideas economists have recommended -- aid to states, infrastructure investment, and other direct spending projects. So they've settled on a fourth- or fifth-best option: a plan to provide employees deeper, temporary relief from the payroll tax, and extend that relief to employers as well. It's not the most stimulative thing in the world -- but it is a tax cut for business owners, so at the very least it should have some buy-in on the right, no?
Brian notes (surprise) that Republicans are opposing this particular tax cut. Senator Kyl explains:
My view generally is that if you can leave more money in the private sector it'll be easier for a recovery to occur," he said. "Now -- if you -- there's been talk about matching the one that was given to employees with one for employers, that would leave more money for the employer to hire and invest. So it could well help businesses be in a financial position to hire more people and begin to expand. The problem is that a payroll tax is supposed to fund couple of our entitlement programs, and since it wouldn't be able to do that we'd have to get that money from general revenues, so that puts more pressure on general revenues and makes it more difficult for all the other things we're trying to fund. So, the answer to your question is yes it might help business, but I'm not sure that its overall impact might not be as positive as we think given the pressures on all the other programs that rely on general revenues.
Of course, tax cuts for the very wealthy do not require offsets according to Senator Kyl. Brian earlier mentioned an argument from Douglas Holtz-Eakin that temporary tax cuts are ineffectual. Tax cuts for the wealthy might indeed be entirely save as the premises of the Barro-Ricardian equivalence proposition likely hold in this case. Payroll tax reductions, however, benefit households that may be borrowing constrained. So even if there would be future offsets, payroll tax relief could still increase aggregate demand in the short-run. Which is exactly the kind of Keynesian fiscal policy that would help.
I don’t think Senator Kyl is as stupid as this comes off. I do think, however, he is hoping voters are this stupid.