October 15, 2009

Payroll Tax Holiday?

If we need another round of stimulus, I can't think of a better idea...

The Administration and Congress are informing the public that everything is beginning to look good because of the trillions of dollars that they provided to repair the banks. The problem is that they have it backwards; the economy is best fixed from the bottom up rather than the top down.

In June 2008, Warren Mosler proposed three ‘bottom up’ policies to fix the economy. The first proposal is for a full Payroll Tax Holiday for both employees and employers. This stops the government from taking approximately $20 billion a week from people working for a living (a total of $600 per month for someone making $50,000 per year) rather than using that $20 billion to keep some bank limping along. The Government would still continue to credit the social security and the Medicare accounts, so employees and employers will never have to pay back the monies they received. The Payroll Tax Holiday would restore income to American workers (and businesses) to help make their loan payments, rents, pay bills, and sustain their households. The real economy would benefit as Americans both reduce debt and resume consumption. Banks will benefit because there will be fewer delinquencies and foreclosures in non fraudulent mortgages, which will also help limit home price declines. The Payroll Tax Holiday would also reduce corporate cost structures and help contain prices and inflation. The payroll tax is regressive (it is not graduated based on income like the income tax), so the Payroll Tax Holiday will benefit those in the lower income levels the most. This “People Power” solution will be far more effective than the Bush and Obama trickle down solution. And the Government can decide to end the Payroll Tax Holiday should the economy become too strong and inflation become a concern.

While the banks did need to be stabilized, the President and the Congress (mostly because of Republicans and Blue Dogs) focused the stimulus more on marginal tax cuts than on real tax cuts to people who would actually spend money.

Of course, Mosler isn't saying anything about wage growth which is the real, far larger problem. Until we fix that, we're going to continue to concentrate wealth at the top and we'll be continuously vulnerable to another economic meltdown.

Posted by mcblogger at October 15, 2009 11:18 AM

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