A True Economic Stimulus Plan

Don’t extend benefits for unemployment. Suspend the payroll tax to spur work and growth

By Casey B. Mulligan and Stephen Moore. Excerpts:

"The payroll tax suspension would reward employees for returning to their jobs and working more hours by providing a 7.5% rise in take home-pay immediately on income up to $137,700. (Income over this amount would still be taxed at the usual rate, which is lower.) The suspension of the additional 7.5% tax on employers’ wage and salary costs would encourage small businesses to hire more employees by reducing the cost.

The unemployment-benefit extension would discourage work. According to the Congressional Budget Office, it would pay 5 out of 6 workers more to stay unemployed than to return to their previous jobs. Already employers are having trouble persuading employees to come back."

"we estimate, based on employment sensitivity to higher wages, that the full suspension of the payroll tax through the rest of the year would increase employment by about 2.7 million jobs. This would stimulate the economy, increasing gross domestic product in the fourth quarter by 1.2% over what it otherwise would be.

Low-income Americans would disproportionately benefit from this policy because they pay a larger share of their income in payroll taxes. A University of Pennsylvania Wharton School study estimates a gain of after-tax income to the lowest-income workers at 7.2% to 10.7%, as employers pass on part of their tax savings in higher pay."

"the Pelosi plan would eliminate 10 million jobs and increase the unemployment rate by 6 to 8 points (after adjusting for misclassification errors). That would depress GDP for the rest of the year by roughly 5%."

"these two competing economic approaches were tested in practice during the financial crisis a decade ago. Britain implemented temporary tax cut of 2% of income from 2008 through the end of 2010. In the U.S. President Obama signed into law the 2009 Recovery Act, or “stimulus,” which increased cash benefits, health insurance and food stamps for the unemployed.

The U.K. jobs recovery began earlier, and by the end of 2014 the employment rate exceeded precrisis levels. In the U.S., with higher benefits for not working, unemployment stayed very high for several years and the recovery was one of the most anemic in modern times. Mr. Obama did cut the payroll tax temporarily by 2% of income, but the effects of higher marginal tax rates from other Obama policies, especially ObamaCare mandates, canceled out any positive effect.

The major argument against suspending the payroll tax is that it helps only those who already have a job. This ignores that many jobless people live in a household with somebody employed. The payroll tax cut is designed to get millions of unemployed Americans into the job market and earning paychecks, which stimulates both the supply of and the demand for goods and services."