Lawrence Lindsey Joins the Schumpeter Club

The economists favors a payroll tax cut now to boost the economy.


Former White House economist Larry Lindsey offers his version of fiscal stimulus: a payroll tax cut now, a carbon tax later. This makes him eligible for both my pro-growth Schumpeter Club and Greg Mankiw's Pigou Club. Of course, the reasons that Obama won't go for this idea are that a) it has nothing to do with pushing through his pre-existing economic agenda and b) won't create new constituencies for Big Government largess. Here's Lindsey:

Permanent tax cuts offer a much better option. The incoming chairman of the Council of Economic Advisers, Christina Romer, has estimated that the macroeconomic benefits of tax cuts can be two to three times larger than common estimates of the benefits related to spending increases.

The relative advantage of tax cuts over spending is even clearer when the recession is centered on the household balance sheet ... in particular, a permanent halving of the current 12.4 percent Social Security payroll tax on the first $106,800 of wages, split evenly between workers and employers. The direct revenue effect of that would be a bit under $400 billion per year, roughly in line with the present quantitative needs of the economy.It also meets our three tests of effective stimulus. First, the funds would flow directly to households through higher take-home pay and indirectly through a reduction in the cost of employment.  ... Second, the funds would be extremely timely, with the benefits hitting the economy with the first paycheck after the plan was implemented. Third, by lowering the taxation of labor, the plan would help produce a higher-employment recovery than would otherwise be the case.

Since the tax cut should be permanent to have maximum effect, the biggest challenge would be how to make up for the lost revenue once the macroeconomic need for fiscal stimulus had passed. In the short run, effective fiscal stimulus requires that government revenue drop, thereby enriching the private sector, and with the Treasury making the Social Security trust fund whole by way of intergovernmental bookkeeping. Longer term, however, spending cuts or a new source of revenue would be needed.Given the agenda of the incoming administration, the best source of such funds would be a greenhouse emissions tax