Keynes Supported Counter-Cyclical Payroll Tax Reductions

by Mario Rizzo


It seems that a number of conservative or libertarian economists are now supporting a temporary reduction in payroll taxes as a preferred stimulus idea. See, for example, here  


John Maynard Keynes beat them to it! In correspondence with the economist James Meade in 1942 Keynes says he is “converted” to Meade’s idea of altering the social security payroll tax over the business cycle. Here are Keynes’s words:


I am converted to your proposal…for varying rates of contributions in good and bad times. (June 16, 1942). Keynes, Collected Writings, vol. 27, p. 208. 


…[Y]ou are able to show fluctuations in income of an order of magnitude which is significant in the context… So far as employees are concerned, reductions in contributions are more likely to lead to increased expenditure as compared with saving than a reduction in income tax would, and are free from the objection to a reduction in income tax that the wealthier classes would benefit disproportionately. At the same time, the reduction to employers, operating as a mitigation of the costs of production, will come in particularly helpfully in bad times.  (July 1, 1942). Keynes, Collected Writings, vol. 27, p. 218.


My purpose in this post is not to say that because Keynes supported this idea that it is a bad one. In fact, I am expressing no opinion – at this writing – about whether it is advisable to have a temporary reduction in payroll taxes as a stimulus. However, let me add that the other part of the Meade-Keynes plan was to pay for the lowering by a commensurate rise in good times.


Forget about the idea of making up for the lowering, for a moment: Does our political system have what it takes to go back to the current rate after a “temporary” decline? I don’t know.


Note: Greg Mankiw’s plan of permanently eliminating the payroll tax and offsetting it with a carbon tax raises different issues. It is worth considering.


UPDATES: This has been linked at Marginal Revolution. Take a look at the growing number of comments there. Tyler Cowen asks if Keynesians will now support a payroll tax reduction. It has also been mentioned by Greg Mankiw on his blog.


14 thoughts on “Keynes Supported Counter-Cyclical Payroll Tax Reductions

  1. Hayek spent a lot of time with Keynes during WWII.

    Hayek’s impression was that Keynes changed his theories and recommendations as his focus on different issues changed.

    And Keynes made it clear to Hayek that he was ready to change his theories and policy recommendations as necessary, if the “Keynesians” coming out of Cambridge led Britain down the path of a ruinous inflationary spiral.

    So don’t look to Keynes for consisted ideas or policy recommendations …

  2. […] I was encouraged when public support for the bill fell below 37%. Rational arguments by smart people (even economists) were raised in opposition to this bill. Examples include: Megan McArdle (also here), with Sully chiming in (but still apparently unable to resolve his claimed conservative principles with his continuing P.D.S. affliction), Steve Verdon, Greg Mankiw and others. […]

  3. Various spending proposals are appropriately Keynesian in spirit. However, they overlook that the key problem is the financial ssector. Thus Paulson’s investment in the banks was useful, but Obama’s stimulus package probably won’t do much good.

    In his history of the Great Depression, Temin pointed out that one of the key events was the surprising decline in consumption in 1930. Other observers have pointed out that in 1930 consumers focused on paying off their current debts. We may face a similar problem now. Again, the problem is basically financial.

  4. […] But it’s the State having less money to spend which is why it’ll be rejected even by those who insist that there should be more fiscal expansion. Despite the fact that Keynes himself supported exactly that, the reduction of payroll taxes as a method of fiscal expansion. No, really, he did. […]

  5. […] Now, as it happens, I’m inclined to a belief in that general Keynesian contention. We’ve now proof that zero interest rates isn’t a bound, QE can leap such constraints. Hey, maybe it’s not even he best solution but it is one. We’ve also historical episodes of recovery from recession while cutting deficits – it depends upon greater monetary stimulus than fiscal consolidation. Even so, that general Keynesian idea, expand the budget deficit to prop up demand. OK, why not? But let’s do it in the only manner a modern government can achieve in anything timely. It cannot spend upon infrastructure because Swampy gets to come to the public inquiry. So, we need to do it the way Keynes suggested, cut national insurance: […]

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