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.