NCPA - National Center for Policy Analysis

Cut Payroll Tax for Employers, Not Employees

January 19, 2011

The 2010 tax deal President Obama struck with Republicans cuts the payroll tax for employees, but it is better to cut the payroll tax for employers than employees, says Robert P. Murphy, senior fellow in business and economic studies at the California-based Pacific Research Institute. 

The rationale for cutting the payroll tax on employers relies on basic economics: If the government makes it less expensive for businesses to hire workers, businesses will tend to hire more workers.

After a severe recession, there is eventually a turning point when the economy begins adding jobs, on net, every month.  When this happens, it is not because all of a sudden every company in the country stops shrinking and starts expanding.  Rather, the turning point occurs when the growing group of expanding companies finally begins adding more jobs than are cut by the shrinking group of downsizing companies.

  • Giving all employers a 2 percent cut in labor costs would simply stack the deck in favor of the expanding companies.
  • Even in a tough economy, expanding companies could try to win market share by slashing their own prices to consumers.
  • This strategy is all the more affordable when the government lowers its tax bite on wages paid to employees.

In contrast, the new tax deal gives the 2 percent payroll tax cut to the employees, based on the Keynesian notion that what the economy needs right now is more spending.  By letting workers keep a larger portion of their pretax income, the hope is they will go buy more things, which in turn will give employers reason to hire more workers, says Murphy.

Source: Robert P. Murphy, "Better to Cut Payroll Tax for Employers," Investor's Business Daily, January 10, 2011.

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