Monday, December 5, 2011

A Republican Who Doubts the Laffer Curve?

Congressman David Schweikert of Arizona suggests that the payroll tax holiday will increase the deficit:

The simple fact is that this sort of temporary tax stimulus has repeatedly shown that without offsets, they only stimulate bigger federal deficits.

OK – but Republicans also want us to believe that tax cuts for well to Americans pay for themselves. The original Laffer curve was a proposition that even in a full employment economy, tax rate cuts so increase economic activity that tax revenues go up. Laffer described this in terms of reducing the wedge between the demand for labor and the supply of labor, which a reduction in the payroll tax would accomplish.

But to be fair to the Congressman – I should mention two points: (1) few labor economists ever bought the assumption that the labor curve was that elastic; and (2) we are not currently in a full employment economy. Point (2) would have us think in terms of the Keynesian marginal propensities to consume for households receiving the tax cut. If the household were very well to do, one would think the marginal propensity to consume would be low, which would lead to the conclusion that “tax stimulus” would “only stimulate bigger federal deficits”. But tax cuts for the working poor – which is what this payroll tax holiday is designed to accomplish – could lead to an increase in economic activity.

Conclusion – by any economic model, the Congressman has this exactly backwards. But what else is new?


Barry DeCicco said...

"Congressman David Schweikert of Arizona suggests that the payroll tax holiday will increase the deficit:"

If he says the same thing about tax cuts for the rich, then he's honest (if mistaken). If he doesn't, then he's just in the GOPnomics school, that tax cuts or spending on the 99% is evil; tax cuts and spending on the 1% is good.

There's nothing surprising about this.

Jack said...

I asked the following question the other day in response to PGL's post of Dec 2 concerning balanced budget multiplier. No answer yet, so I'll ask again on this similarly appropriate thread. With some editing and addition:

So riddle me this. If FICA is legislatively directed to pay Social Security benefits after first winding through the Trust Fund, and if there is a surtax on one's income tax, a tax which is dedicated to flow into Treasury for the purpose of paying general budget expenses; then how does one offset the other? A reduction of FICA revenue may put a strain on the Social Security system by reducing Trust Fund growth and/or principal. A surtax on the income tax can only effect the deficit of the general budget. It does not "offset" a FICA reduction. It's time for politicians and economists alike to stop confusing these two funding streams that are legislatively intended and required to pay different categories of expenses. The "unified bedget" is a legal myth. Read the SSA web site for a full discussion of that point.

I don't agree with the idea of trying to stimulate current spending by cutting back on workers' retirement system, which is what the SS program is with the added benefit of a disability aspect. If Congress cut back the marginal rate on federal taxes for incomes at a middle income level and raised the marginal rate on high incomes or eliminated the advantages of "unearned" incomes that would be an offset.

Tell the Congress creeps to leave their' hands off of FICA, and Social Security in general, its the only damned government program that actually works well.