Obama Considering Reductions in Payroll Taxes on Employers, May Endorse Other Ineffective Economic Policy for Political Reasons

Why Don’t Administration Economists Understand Economics?

At the end of 2010 the Democrats agreed to capitulate to the Republicans on taxes, and agreed to extend the Bush tax cuts on the wealthiest Americans despite

1. the fact that Obama campaigned specifically against that

and

2. A majority of Americans supported ending the tax cuts for the wealthiest Americans.

But wait, there’s more!  In order to make Republicans even happier, the Administration proposed and the Republicans accepted a 2 percentage point cut in the payroll tax rate paid by employees for one year.  Temporary tax cuts of this nature are never very effective in the opinion of The Dismal Political Economist, and there is no evidence that this one would be, or looking back after 6 months, was.

Now the Administration is considering extending the payroll tax cut and including the employer portion

   Obama believes the administration should “certainly look” at whether to extend payroll tax cuts set to expire at the end of the year, White House Press Secretary Jay Carney said. He said the president also is open to considering initiating a payroll-tax reduction for employers — an idea that would likely garner support from Republicans and businesses.

And

The White House wouldn’t say whether the payroll-tax cuts were being considered in bipartisan Congressional deficit meetings led by Vice President Joe Biden. Biden is meeting with a group of Republican and Democratic lawmakers again Tuesday afternoon to try to find common ground on reducing the deficit.

Exactly why is cutting payroll taxes a part of deficit reduction talks which presumably contain some discussion of raising taxes?  And why don’t the economists in the administration understand that it is lack of demand for labor, not the cost of labor that is impacting the weak job market?  Cutting the cost of labor by two percentage point is not going to get business to go out and hire a bunch of workers they don’t need just because the cost is only 98% of what it otherwise would be.

So why is this policy under consideration?  The answer, see the “garner support from . . . business” above.  In case anyone was unaware of it, there is an election next year. 

 And if nothing is changed the payroll tax on employees will go back to its original level in January 1, 2012.  And on January 2, 2012 Republicans will start their “Obama raised taxes on working Americans” campaign.  So this will prevent that, causing the Republicans to start their “Obama increased the deficit” campaign instead on January 2, 2012.

Republican position on all this:  Makes no difference to us, we are good to go January 2, 2012 either way.