More on Payroll Tax from Roubini

Nouriel Roubini followed up the comments at Zeitgeist that I referred to on Thursday with an article yesterday in the Washington Post, again advocating a temporary (two year) cut in payroll tax.

Part of his argument is that some of the recent policy proposals from the Obama administration, such as tax credits for R&D and accelerated write offs of capital expenditure, subsidize demand for capital, whereas he believes that capital expenditure has already been accelerating quite well. However this expenditure essentially allows production to increase without a need for additional hiring.

Payroll tax reduction for employers on the other hand would subsidize the cost of labor and encourage hiring. Additional smaller payroll tax reductions targeted towards lower income employees would provide a boost to consumption while also allowing some household de-leveraging.

In order to make such a plan deficit neutral, he favors paying for it with the expiration of the Bush tax cuts on those earning more than $250,000. He argues that since many of those people are also employers, such a tax increase should not be viewed as penalizing the wealthy. Essentially, for wealthy business owners, he takes with one hand (higher income taxes) and gives with the other (lower payroll taxes).

From his comments at Zeitgeist, I know that Roubini believes that investments in capital that increase productivity are the ultimate source of growth. However I realize his concern here is with protecting the economy and household incomes in the near term. Essentially what I think he wants is to give the economy time to make necessary structural adjustments, but minimize the pain for individuals in the meantime by creating a nett transfer of income from the wealthy who do not own businesses to lower income employees and those currently unemployed.

His proposal makes sense to me, and I think it probably would alleviate some of the current weakness in the economy. However, as a general rule, I dislike policies that seem ad hoc – I prefer policies that explicitly codify clear principles in a straightforward way and provide transparency in exactly what economic costs are being borne by whom. Neither of these is really evident to me here. However, frankly, these are concerns I have about the tax system as a whole, and it’s probably not fair to try to judge a short term proposal like this by standards that the system as a whole doesn’t meet either.

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