Friday, March 20, 2009

Payroll Tax Holiday

Rick Hertzberg pimps the idea of a payroll tax holiday as a stimulus option and then also advocates abolishing the payroll tax altogether.  Abolishing the payroll tax would be a step in the right direction policy wise.  It is a regressive tax and it is a tax on labor thereby reducing the returns to work.  That said, the payroll tax currently comprises about 1/3 of all federal revenues.  Even if you implemented some taxes such as a carbon tax and a securities transaction tax, you would only be a 1/3 if the way towards offsetting payroll tax revenues.  If you were to completely offset the payroll tax you would have to implement a VAT or consumption tax of some form in addition to a carbon tax/securities transaction tax.  Such a shift would probably have negligible distributional effects but it would be a lot more efficient.

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