Roubini: tax cuts are the answer

[30ashopper]

Most policy approaches, including the Obama proposals, have tended to subsidize the demand for capital rather than the demand for labor. That has the problem backward. In the second quarter, capital spending reached an annual growth rate of 25 percent. The argument that increased demand for capital leads to greater demand for labor (i.e., if you buy more machines you need workers to run them) has not held up. Firms are investing in capital goods, equipment and offshore offices that allow them to produce the same amount of goods with less -- and lower labor costs. To avoid a chronic increase in the unemployment rate, we need to subsidize the demand for labor -- achieving job creation -- rather than making it cheaper to buy capital, as investment and other tax credits would do.

President Obama could fully fund the reduction in payroll tax by allowing the Bush tax cuts for people making more than $250,000 a year to expire. Meanwhile, the Bush-era cuts affecting middle- and low-income earners -- the vast majority of Americans -- would remain in place for the time being.

After two years, when U.S. growth is more robust and the pace of private-sector hiring has picked up, we can afford to phase out the payroll tax cut while maintaining the income tax rates for the rich. It's possible also that we could increase the tax burden on the middle class over time to reduce our budget deficit.

washingtonpost.com

Unfortunately, this kind of policy goes against the grain of the current administration's view of how the economy works. But maybe, just maybe, if the republicans gain a lot of seats, we'll see something along these lines next year.

 

[TooFarTampa]

Roubini's solution seems very sensible. but your headline is misleading. It's still 2010 and Roubini is not proposing tax cuts per se. How is this different from what Obama has proposed? I am serious. When I last checked in on the latest from the prez, your second paragraph is what he was proposing.

 

[TooFarTampa]

My apologies 30ashop, should have read the article and not just the excerpt you posted. But I am still a bit confused. Is Roubini saying Obama should cut the payroll tax further (because he already did). And don't they pretty much agree on which tax cuts should be extended?

 

[30ashopper]

My apologies 30ashop, should have read the article and not just the excerpt you posted. But I am still a bit confused. Is Roubini saying Obama should cut the payroll tax further (because he already did). And don't they pretty much agree on which tax cuts should be extended?

I'm not aware of Obama proposing or cutting payroll taxes. He did sign into law a $400 "making work pay" tax credit, which is similar, it temporarily reduced withholding for people making less than 75K a year. That ended in 2009.

This is beyond that and the extension of the Bush era income tax cuts for those who make less than 170K a year, or married couples who make 250K a year, which are currently in effect. We're talking about social security, medicare, and unemployment taxes. (Bob's "big lever" in another post.) Roubini is suggesting a signifigant cut over a two year period in taxes they are currently paying, vs. tax credits, deductions, and other forms of post-tax refunds.

(Maybe Buz can provide more detail?)

 

[TooFarTampa]

Gotcha. I was not aware that the credit ended in 2009.

So any payroll tax cut (say, down to 5 percent) would benefit both workers and employers. I can see the value in that but it seems politically difficult because like every other fix it would also increase the deficit in the short term. I much prefer it though over additional government spending.

 

[Bob]

pull the lever obamster, or your visit may be brief.....kill capital gains, incentivise hiring.....declare tax free zones in blighted cities. means test ss, tweak the ages, invest in infrastructure, and do it yesterday!