A THREAD on why wage subsidies in the form of negative payroll taxes merit consideration in Phase 4 stimulus, echoing my recent op-eds with Art Laffer (1/n)
1: what is a negative payroll tax wage subsidy? It is the result of cutting the payroll tax not only to zero (which arguably provides too little relief) but lowering it further to make the payroll tax rate negative to become a payroll wage subsidy or “negative payroll tax” (2/n)
2: The beauty of a payroll tax waiver or payroll subsidy for both employer and employees is that it doesn’t have to go through inefficient government and banking administration which add significant costs (3/n)
3: In essence, both employers and employees would both receive money from the federal government on a biweekly basis instead of having to pay the government a certain percentage of wages in payroll tax (4/n)
4: The CARES Act (Phase 3 stimulus bill) does provide the Employee Retention Tax Credit, a payroll tax credit equal to 50 percent of certain wages paid by eligible employers, with a maximum tax credit of $5,000 per employee (5/n)
5: Sen. Josh @HawleyMO, R-Mo., has recently proposed a payroll tax rebate that covers 80 percent of payroll expenses hawley.senate.gov/sen-hawley-out… (6/n)
6: @RepJayapal, D-Wa., similarly has proposed to cover 100% of base payroll costs for at least three months, up to an annual salary of $100,000 per worker (7/n) jayapal.house.gov/wp-content/upl…
7: Canada is implementing payroll wage subsidies where employees receive 75% of their paycheck respectively in the form of tax credits (albeit the Canadian wage subsidy rollout timeline has been less than ideal and won't be delivered until May) (8/n) canada.ca/en/revenue-age…
8: The UK under Chancellor @RishiSunak has quickly rolled out an 80% wage subsidy (9/n) gov.uk/guidance/claim…
9: And Denmark is implementing a 90% wage subsidy as eloquently explained by @DKThomp (10/n) theatlantic.com/ideas/archive/…
10: A recurring biweekly payroll subsidy (rather than a one-time tax credit) would likely help boost consumption because of "mental accounting," a behavioral phenomenon where people are more likely to spend what they see as a permanent income boost vs. a one time windfall (11/n)
11: Many made the "mental accounting" case for the temporary 2% payroll tax cut in the 2010 Tax Relief Act which was passed in response to the Great Recession (12/n) newyorker.com/magazine/2009/…
12: Implementing a negative payroll tax would require the help of private payroll processing firms like ADP and Paychex. Treasury is already laying the implementation groundwork with distributing paid family leave advances (from the Phase 2 bill) through the payroll system (13/n)
13: A payroll tax waiver and negative payroll tax/wage subsidy also allows employers to more easily pass through a pre-subsidy wage cut to workers. A payroll tax cut/subsidy would alleviate such downward wage rigidities (sticky wages) and help mitigate mass unemployment (14/n)
14: While one common criticism of a wage subsidy such as the Earned Income Tax Credit (EITC) is that it incentivizes employers to cut wages, this becomes a feature rather than a bug in this countercyclical case (15/n)
15: Wage subsidies are not without meaningful costs both in static dollars and dynamic costs in the form of labor market distortions (how steep the phaseouts and implicit marginal tax rates are). Means testing and how gently sloping the phaseouts are is a delicate balance (16/n)
16: In contrast to the negative income tax experiments of the 1970s which were shown to reduce the labor supply, using a negative payroll tax to (effectively) pay employers and employees to stay together could avoid such drawbacks depending upon the employee-employer split (17/n)
17: Wage subsidies have an interesting history (which will be saved for another thread at a later date) though this summarizes our case for a negative payroll tax as a fast and efficient way of delivering economic relief during the current pandemic (18/18) nationalreview.com/2020/04/corona…
