Public Works Are a Better Idea Than a Payroll Tax Holiday

| Tue Aug. 30, 2011 1:48 PM EDT

Bruce Bartlett lists several reasons why a payroll tax holiday might not be such a great idea. Here are the first two:

First, the tax cut only helps those with jobs. While many have low wages and undoubtedly are spending all their additional cash flow, those with the greatest need and most likely to spend any additional income are the unemployed.

Second, the payroll tax cut helps many workers who have no need for it and will only pocket the tax savings.

Yep. I've never had a problem with payroll tax cuts being used to pay off debt instead of being used to buy more stuff. After all, weak demand isn't our only economic problem. Debt overhang is a big problem too, and reducing it is helpful for our long-term recovery. The problem is that a payroll tax cut is weakly targeted for both spending and debt reduction. Poor people, who are the most likely to spend the money, pay little or no payroll tax in the first place. And richer people, who are the most likely to save it, don't usually have any big debt problems. Most of the benefit of a payroll tax cut, therefore, is limited to a smallish segment of the public that's (a) rich enough to get a significant amount from a payroll tax holiday but (b) poor enough to either spend it all or use it to pay down debt. I don't know how big that segment is, but probably not more than a quarter or a third of the population. Much the same is true of other tax cuts.

So what to do? Bartlett again:

In my view, the $110 billion cost of the one-year Social Security tax cut would have been far better spent on measures that would actively raise spending in the economy. Public works would be the best way of doing that. Under current economic conditions, all tax cuts are essentially passive and do almost nothing to increase aggregate demand or economic output.

Sign me up! The only question is, can we get any Republicans to sign up too?