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Payroll tax cut -- a new entitlement?
Raymond Richman, 12/22/2011

The cut in payroll taxes proposed for 2011 was greeted by economists as a powerful contribution to economic recovery. There is no evidence that it contributed to recovery at all in 2011. The federal Bureau of Economic Analysis reported that the U.S. Gross National Product, the total amount of goods and services produced in the U.S., increased at a rate of only 1.3 percent in the second quarter of 2011 and 1.8 percent in the third quarter. Economists of Deutshe Bank in 2000, predicted that the economy would grow at a rate of 3 percent by the 3rd quarter of  2011 without the 2011 tax cut and 4 percent with the tax cut. They were obvously using a clouded crystal ball. We are now warned by the  same economists that failure to pass the tax cuit would cause a downturn in the economy, presumably of 1 percent. They were wrong then and are wrong now. We believe the economy would do quite well if we had a government that was not hostile to private enterprise.

There is also little evidence that any growth at all resulted from the Recovery Act of 2009 which allocated nearly $800 billion dollars to be spent between 2009 and 2011 inclusive. We predicted its failure to induce economic growth because the projected government spending was concentrated on transfers to states, school districts, and local governments to finance their budget deficits (most of them have constitutions which limit their borrowing), wasteful expenditures on environmental projects none of which would be undertaken without major federal and state subsidies, and wasteful subsidies to hybrid and electric vehicles and biofuels, etc.  The President’s proposed $500 billion stimulus package for 2012 is characterized by similar defects as we pointed out in a recent article of this site.

The hostility of this regime to private enterprise is also evidenced by the President’s refusal to allow the building of a pipeline from Canada to the Gulf, his ban on drilling in the Gulf, and by the so-called Environmental Protection Agency’s rulings apparently intended to destroy the productive coal industry. Private investment was also affected negatively by increased business regulations. Given that the payroll tax reductions were expected to be temporary anyway, the first effective for only 2011 and the recent Senate-passed recent two-month extension to February 28, 2012, it is unlikely to promote private investment. To make it permanent would be at the expense of the Social Security System unless the payroll tax cut were made up by other taxes or borrowed funds that add to the national debt and have to be paid by taxpayers in the future. Borrowing to finance the tax cut has international economic repercussions because it weakens the dollar which is the standard for international trade. There are already calls for a new world standard by China, which is beginning to promote its yuan, by the IMF which is promoting its drawing rights, and by the Eurozone at least until the recent collapse of sovereign debt in the eurozone. 

The Senate bill, extending the tax cut for two months, is now in limbo as the result to the House’s refusal to pass it. Its payroll cuts benefit working households and some businesses by giving them a tax cut. The Congressional Budget Office estimates that it, plus the extension of unemployment benefits for a year, would cost in excess of $10 billion dollars a month. The budget deficits for fiscal 2011 amount to about $1.5 trillion and is expected to be about the same for fiscal 2012.

How is it proposed to finance the payroll tax cut in the bills pending before the Congress? By a tax on new mortgages of roughly $850 for a home valued at $200,000. The burden of the tax will be shifted to sellers by a process economists call backward shifting. (See the chapter on the property tax in our book, Trading Away Our Future, 2008.) Apparently, Pres. Obama wants to make the payroll tax cut permanent and finance social security out of the general fund rather than payroll taxes. The payroll tax cut is unlikely to create any jobs at all. 

For all practical purposes, the programs to substitute wind and solar energy for fossil fuel produced encergy, and to substitute biofuels for fossil fuels, etc., rather than creating employment, the wasteful spending on alternative energy enterprises have cost millions of productive manufacturing jobs, many of which, if not most of which, have been outsourced abroad. Not one of the alternative energy plants would have been built without federal, state, and local government subsidies. They are being built a half century or more before their time. When the cost of fossil fuel rises as it must as reserves become depleted and costs of extraction rise, private enterprise would undertake them without the need for government subsidies. One thing we know for sure, there is more carbon in the atmosphere than ever before and we’ve just experienced a decade of global cooling.

 The theory that global warming is man-made has come under attack by many scientists some of whom have developed an alternative theory that climate changes are caused by magnetic disturbances in the sun and their effect on cosmic rays. An experiment has just been completed at CERN, the world’s most advanced nuclear research center, which appears to confirm the role of cosmic rays in climate changes. Historical evidence likewise suggests that climate changes are not man-made but are the result of natural phenomena. The scandals at the universities in East Anglia, Penn State, and elsewhere which showed that the scientist proponents of Anthropogenic (man-made) Global Warming (AGW) stifled publication of research which challenged their global warming theory.  The involvement of politicians like Al Gore suggests that its leaders have ulterior motives. The fact that the theory was advanced by a suspect organization like the UN’s IPCC, is more suggestive of Stalinist-like science than unbiased research. Its leaders around the world may well be motivated by a desire to displace capitalist enterprises by government-financed private enterprises reminiscent of the policies pre World War II in France and Italy. The trouble with an increased government role is that it has already reduced the living standards of American and European workers. 

In our view, it was a mistake to pass the 2001 payroll tax cut. It is a mistake to extend it. The money goes to those who have jobs; it does little or nothing to create jobs. The money could have been better used to induce corporations to return their off-shore operations to the U.S. by tax reforms. For exmple, we recommend the elimination of the Corporate Income Tax and its integration with the personal income tax by treating corporations as partnerships.

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Comment by Larry Walker, Jr., 12/27/2011:

I agree! When you wrote "2001 payroll tax cut", I assume you meant "2011".

Response to this comment by Raymond Richman, 12/31/2011:
Right. Thanks. I made the correction. Raymond Richman

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

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  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

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  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]