Bloomberg reports that the Obama administration is mulling employer-side payroll tax cuts as a form of additional stimulus.
The idea, which is in preliminary stages of discussion, is among several being talked about at the White House as the economy holds center stage for the administration and Congress. The unemployment rate in May rose to 9.1 percent, the highest level this year.
This is better than nothing, but by how much, I'm not sure. As Matt Yglesias points out, the best time for this was at the beginning of the downturn, when employer-side payroll tax cuts would have acted as a disincentive for lay-offs. Right now, they might encourage hiring, but that's doubtful. As the Economic Policy Institute's Ethan Pollack says, businesses aren't dealing with onerous labor costs or an absence of liquidity -- indeed, they have plenty of cash -- they're dealing with a lack of demand. Yes, it's true that at a certain point, deep tax cuts would push the marginal cost of labor to the floor, and make hiring (in a low-demand economy) a worthwhile endeavor. But realistically, taxes aren't going to go that low, and businesses are only going to hire if they have demand to meet, which won't be generated by employer-side cuts to payroll taxes.
If you're trying to stimulate the economy through further tax cuts, it makes a lot more sense to continue the employee-side payroll tax holiday, and possibly deepen it, to 4 percent instead of the current 2 percent. As far as creating demand is concerned, handing money to individuals is a lot more effective than giving it to businesses.
As an aside, I will say that I'm a little worried about further tax cuts, their effectiveness notwithstanding. If the administration manages to get another tax holiday, I wouldn't be surprised if Republicans used these tax cuts to set a new baseline and treat the pre-holiday rates as a "tax hike" instead of a return to normal.
