The Missed Opportunity of the Payroll Tax Cut
By Bryan Caplan
Yesterday, while reviewing my tax withholdings, I noticed a weird anomaly. In 2011, for the first time in my life, my employer was paying more Social Security taxes than I was. I furrowed my brow until I remembered this earlier post:
Obama’s proposed payroll tax holiday botches an idea of truly Singaporean cleverness.
Instead of giving the tax cut to employers, where it would do the
maximum good, or splitting it evenly, where it would do intermediate
good, he’s giving all of it to employees, where it does the minimum good…
I admit that I may be unusually clueless about my income. I further admit that workers don’t have to notice a tax cut to respond to the higher income it generates. But I still have to insist that tax cuts are more likely to change behavior if they’re widely noticed – and Obama’s payroll tax cut doesn’t qualify.
Would employers have been any more responsive? It’s hard to prove, but still highly plausible. Would employers, long stereotyped as money-grubbing bean-counters, really have taken my ten months to notice that their labor costs were 2% lower? If you’re still skeptical, put yourself in the shoes of an employer who spends 70% of his expenses on labor and earns a 5% return. All else equal, a 2% reduction in his labor costs implies 30% higher profits. Sounds like a great time to expand his business.