By Stephanie Kelton, Associate Professor of Economics, University of Missouri-Kansas City
My colleague and fellow blogger, Randy Wray, has just argued that President Obama should scrap the speech he’s planning to deliver tonight and surprise the American people with something entirely different. I couldn’t agree more. And while I agree that job creation must be JOB ONE in the months (and years) ahead, I would encourage the President to make massive tax relief the cornerstone of tonight’s speech.
Specifically, the President should call on Congress to support a full and immediate payroll tax holiday. Right now, the government takes away about 15% of our incomes in the form of payroll taxes. With a full payroll tax holiday, a married couple earning $60,000 a year would see their take-home pay increase by about $750 each month. In the aggregate, this will help millions of Americans pay their mortgages, student loans, credit card bills, and so on, while at the same time reducing business expenses (remember that employers contribute to the payroll tax too). All told, a full payroll tax holiday would allow Americans to keep about $1 trillion this year.
So stand before us, Mr. President, and tell us that you want to stop taking this income away from us until we, as a nation, have clawed back every job that has been lost since the start of the recession. Tell us that you intend to take bold steps to protect jobs, keep families intact and provide relief for millions of American businesses. Tell us that you have done all you intend to do to help the banks and the automakers and that you will not accept a jobless recovery — that an increase in economic activity is meaningless without rising employment in good jobs.
And, most importantly, tell us that you refuse to adopt a timeline for cutting the deficit. Tell us that you will not take one dime of payroll taxes away from us until your Administration can declare “Mission Accomplished” on the job front.
Finally, tell the American people that anyone who opposes a payroll tax holiday wants to keep taking hundreds, perhaps thousands, of dollars from them every month. Then watch what happens in 2012.
41 comments
Comments are closed.
Geez. And me and Bret Farve and everybody else you know would be coming out of retirement
Lots of iPads to sell! I’m sure we can entice another 1 trillion in bond sales this year without interest rates going up.
This article is ridiculous. I’m all for reducing taxes, but how about we get there the proper way: by first reducing expenditures? It’s called responsibility, people.
Job creation? Easy! Government subsidized loans to all organizations in proportion to their history paying the payroll tax.
I’m with Thisson on this. What a silly idea.
And even aside from the debt, people lucky enough to HAVE jobs need to pay taxes to help those who aren’t so lucky, don’t you think?
What an absurd notion.
Taxes on the well to do should be increased significantly – they’ve already been cut significantly, and it’s about time they paid their fair share. Everyone has a responsibility to the nation they live in – if they wish to shirk that then they are effectively trying to undermine it from the inside. It is bordering on treason, and they cannot escape forever the social problems their greed will cause. Put in a 95% top bracket – and then see where their national allegiance lies.
And maybe if companies paid decent wages rather than stealing profits in the form of obscene bonuses, people would have enough to live on, and could afford to keep the nation working smoothly through a few taxes.
Obama could shut down the war machine though, how many trillions would THAT save? Not to mention return some of the goodwill lost in the rest of the world.
In a way,what you are proposing is already happening. The unemployed won’t be paying federal taxes and payroll stuff will they?
I think we need pro-business type measures, like, for example, anyone who has filed in the last 10 years, and whose average AGI is less than $72,000, gets a monthly check for the difference between their AGI per month and $72,000. This money can be deposited, spent on necessaries and stuff, thereby becoming someone else’s income, or saved. It should be kept out of the TBTF banks by fiat.
There also ought to be significant public investment in health, education, power, water and transport. But that’s probably obvious by now.
Nice to see some of the ideas from Modern Monetary Theory working their way toward the mainstream. Warren Mosler has another idea:
Sounds good to me.
If I was fully invested in commodities and wanted to see the dollar destroyed, it would sound like a good idea to me as well. Is that how your portfolio is positioned, lambert?
hi lambert,
this comments thread is amazing, especially after the number of posts there has been on the issue of fed spending (fed budgets don’t work like household budgets where revenue or debt is required first, prior to spending).
i really wish someone would critique MMT on it’s merits instead of on ideology and conventional wisdom. orthodox economic thinking isn’t getting us very far and rejection without bothering to understand a heterodox approach seems strange. silly me, i thought the order was understanding first, judgement second. maybe a lesson in cognitive capture by our elites. now, how to make use of that info?
anyway, here’s a few posts from wray last summer that lists more of his proposals for dealing with our economic situation and some background:
http://neweconomicperspectives.blogspot.com/2009/06/professor-l-randall-wray-responds-to.html
http://neweconomicperspectives.blogspot.com/2009/08/monetization-of-budget-deficits.html
http://neweconomicperspectives.blogspot.com/2009/07/carnage-continues-time-to-ramp-up.html
And free candy for all the children! What kind of fantasy world does Stephanie Kelton come from. No really, I’m all for the suspension of payroll taxes (actually doing away with income tax in it’s entirety does me well) but we’re already a couple of TRILLIONS in the hole. I think Pink Floyd said it best “If you don’t eat yer meat, you can’t have any pudding. How can you have any pudding if you don’t eat yer meat?”… TIME TO GROW UP.
Don’t blame this stupidity on Keynes.
Uh, No. Raise my taxes. Give me a decent government and a decent society that helps the truly unfortunate get by and pay for it by taxing me and other people who are doing okay, not my grandchildren. I will still pay my mortgage and my credit card on my $60k per year, even if it means eating rice and beans a couple of nights a week and reading books from the library on vacations while the kids run under the sprinkler. I imagine this Associate Professor of Economics has been to a Keynesian brainstorming session on the economy in the Econ building at UMKC. Someone needs to tell her this isn’t a computer model she is dealing with and this isn’t a run-of-the-mill business cycle recession we are in where we just need to pile on another few trillion dollars in debt so we can all get back to Leave-it-to Beaver Land. At some point we have to take a hard look at our economy and our lives and realize that we are in a deep hole and that we won’t get out of it with tax breaks for everyone that magically get us back to the good old days. In our country, the idea that taxes (and government) are bad things is a big part of our problems, and Obama doesn’t need to get into a lying contest with the Republicans on this issue. As a people, we are going to have to tighten our belts (and our bankers’ and CEOs’ belts), find a bottom, and try to start growing a decent society, maybe with a little government stimulus and deficit spending, but not by reinforcing the bogus idea that “taking” taxes from the people who live here, to build our highways and bridges, pay our teachers and cancer researchers, put out our forest fires and treat our sewage, and pay the interest on the trillions our forefathers borrowed, is a bad thing.
That’s all you buddy.
As long as we’re wasting 50+ % on funding the war machine, raping the citizens’ privacy, doling out bribes to Israel, Saudi Arabia, etc., and dropping trillions into pork and insolvent banks, I’m not willing to pay one goddamn red cent more than I already do.
I just reread the article and… Stephanie Kelton, Associate Professor of Economics, University of Missouri-Kansas City. YOU’RE FIRED. Economics, sheesh, what a lame profession.
Ah, except they’ll likely be rescued by academic welfare as we know it, at work blowing through the Missouri State Budget.
You do have to grant them that it is hard to justify taxes sometimes. ;)
A tax revolt in reverse. How … artistic!!
First of all, the government will sharply RAISE taxes, not eliminate them.
Second, tax cutting is irrelevant. We are in an energy crisis, not a credit crisis. Shoveling more paper into the furnace will not solve the country’s (countries’) energy problems.
Third, the only way to address – not solve – the current crisis is by energy, mainly oil resource conservation. Unless there is stringent conservation, all other attempts will fail, all of them.
Don’t believe me, just sit back and watch.
Fourth, cutting Federal taxes to zero will not save the states who cannot run deficits and are following Greece and Spain into the ‘default/repudiation trashcan’.
After Greece and Spain are Ireland, Italy, Portugal, Japan, China, Belarus, Ukraine, Latvia, Iceland, etc. etc. etc. Germany cannot bail out the whole of Europe.
The best second way to right the ship of state is for the administration to start holding people accountable. If Obama wanted to do that, he would really shake up the speech and announce his resignation.
Well, it’s no sillier than giving away vast sums of money to the banks, but it’s still pretty silly.
What’s the exit plan? Suppose we do this and it creates jobs as hoped – do we then reinstitute the payroll tax? Won’t that just destroy the jobs again?
Isn’t pretending that we can have things without paying for them what got us into this mess in the first place?
Any discussion of proposed “recovery” options which does not directly acknowledge and seriously address the myth of infinite growth on a finite planet is delusional stuff and wishful nonsense, plain and simple.
NakedCapitalism.com is better than most sites these days but TheAutomaticEarth.blogspot.com is profoundly grounded in finite Earth and indifferent reality.
—
“Progress is measured by the speed at which we destroy the conditions which sustain life.”
– George Monbiot, Consumer Hell
http://www.monbiot.com/archives/2010/01/04/consumer-hell/
—
“Habits that are firmly set – from where people live to what they eat – will all need to be altered and in many cases simplified or minimised… From Earth’s perspective, the American or even the European way of life is simply not viable.”
– Quoting Worldwatch Institute, State of the World 2010 in the article, The end of consumerism: Our way of life is ‘not viable’
http://www.independent.co.uk/environment/green-living/the-end-of-consumerism-our-way-of-life-is-not-viable-1863278.html
Wow, this is a monumentally bad idea. It would be guaranteed to kill Social Security and Medicare and would drag the rest of the federal government down with it. The payroll tax generates the bulk of federal revenues. A $1.3 trillion dollar deficit would jump to $2 trillion or so immediately, and with a very minor, if any, impact on the “recovery.” Ouch.
Meh!
Is this another of the “economic models don´t have to reflect reality, they just have to be internally consistent”?
I´m truly sorry because I really think that helping average citizens should be priority #1. In the USA and Europe.
I just don´t see how adding another trillion dollar to the federal budget deficit in this way will really accomplish that in the middle or long term?
Although of course in a fantasy world you would spend less money on the “war on terror” fable…
You say “this will help millions of Americans pay their mortgages, student loans, credit card bills…”
Great!
And once the banks get that money, what then?
Will they use it to help the “real” economy? I have my doubts…
Private debt converted to federal debt with the banks cheering you on because they get paid “2 times” this way?
With fees and interest rates converted to profit.
They loan money to the federal government which will then be used by American citizens to pay back their private loans to the exact same banks. And after that the exact same American citizens will pay taxes to pay back the government loans used to pay back their private loans? Is that the idea?
That idea might have made sense in 2008 or so?
Instead of giving hundreds of billions of dollars to banks without conditions, let´s imagine we gave that money to American or European citizens. Let´s wipe out their debt and with it, help the banks too. But now…?
Banks already have gotten 10s of billions of tax payer dollars from AIG alone. Without any mortgage, student loan or credit card debts wiped out.
Back in 2008 banks / investors / bond holders might have been happy to get just 60-80% of their money back after the bubble burst. While thinking fondly of all the money they made during the 2000s.
Today?
They expect 100% back because the financial system is too big to fail.
And how exactly would it help employers today?
If I can´t sell my products or services because average Americans or Europeans are paying down their debts why would I add a (cheaper) job if I can´t sell more?
I may be totally wrong here.
I´m not a financial or economic expert.
Just my 2 cents.
Funny … I was actually hoping that a professional academic economist would at least bother to review some of the trial balloons that white house is putting out to telegraph talking points for the speech, but you know, with tenure and all …
She does reveal “The Question” that I think Obama will address tonight: How do we inprove the disposable income of middle income households so that they can INCREASE household debt levels. Expect to hear a lot about these two policy planks (1) cut middle class taxes (2) get banks lending again … The adminstration policy is straight out of Clinton … cut taxes but stimulate the economy through massively increased private debt levels. This is precisely what Bush I and Clinton accomplished. Debt is debt after all, just that interest collected by the rentier class is SO MUCH BETTER than taxes collected by the congress (who are at least nominally accountable to “We the People”). Bush II couldn’t do it with private sector debt alone (already on a rocket ride to the moon), already it required massively increasing gov’t debt.
A tax holiday is code for increased debt levels in the private sector, code for increased income inequality, code for worseing what is essentially economic death by rentier parasites.
I would much rather we had government sector debt than private sector debt…the former is *much* more inefficient than the latter.
So, Mr. President, rip up the speech and start by announcing the return of the WPA and the Pecora Commission. And 90% Capital Gains Tax for all financial “profits” (actually parasitic bloodsucking rent) to pay for the former.
What a bunch of none sense. Have you ever lived in a country where there is no taxes? Well there isn’t police, fire depts. Sanitation, etc etc etc. We need to start thinking about taxes as the cost of services provided not as if it was some kind of punishment. Is there waste? Yes tons of it. Americans want a safe country but not one that keeps a military engaged in multiple wars. BTW lots of people pay home owner association fees gladly. Well that is a kind of tax that the tenants charge on themselves. They do it because they want services beyond what the city provides.
Yeah right, I’m surprised to see an article as stupid as this here Yves. Hmmm, an associate professor of economics? No wonder we’re in trouble.
How do you remotely fund SSI checks and Medicare payments? This is a pure nonsense idea instead of having to make actual hired and difficult compromises on actual issues for the longer-term.
Umm…. A taxpayer only has 7.65% deducted from their pay for Social Security and Medicare taxes (AKA Payroll Taxes). The employee’s *employer* pays another 7.65%. If these taxes were immediately stopped, the taxpayer would only see a 7.65% increase in pay. The taxpayer’s employer would see an associated 7.65% reduction in overhead expenses for the taxpayer employee. But the employer’s share does not appear on the employee’s paycheck stub and so would not magically appear in their paycheck if payroll tax deductions were (temporarily) halted.
Presumably, the holiday law could require an employer to pass their share on to the employee. But this would have to be legislated, it is not automatic with a “payroll tax holiday.” There is no reason to believe that any employer would automatically give every employee a 7.65% *raise*, which is the accounting result of giving the money the employer would no longer be required to send to the IRS to the employee instead.
In any case, *every* payroll program in the country would require major modification to account for these changes. This would likely take 6 months to a year to get the payroll software to work correctly. Moreover, because the employer’s 7.65% going to the employee is new income to the employee (i.e. not just a suspended deduction) there is the question of income tax: is this raise subject to income tax?
Then, when the holiday ends, are the raises rescinded?
Finally, how is the holiday to be treated in one’s social security credits? If one is not paying social security taxes on this income, then presumably, one is not to receive social security credits for the quarters the income was earned. Whose computers are reprogrammed to make this adjustment? The employers? Are their software changed to not report the holiday income to SS? Or does SS change their programs to not count this income as part of the 40 quarters of earned income needed to become eligible for SS benefits?
But if the employer passes the tax savings to the employee then his cost of labour has not changed and he has no incentive to hire more people. In that case this is not a “jobs” proposal at all. This is instead a proposal to extract wealth from the only two social programs that are effective in the US (Social Security and Medicare) and to send it to Wall Street. The author is explicit about it when she says that this will “help millions of Americans pay their mortgages, student loans, credit card bills, and so on”. This proposal will only serve to tighten the chains of debt slavery in America.
I think the whole post was an attempt at sarcasm, which is always hard to pull off in a non-verbal media. If not the author needs to read the Jessie’s post on his blog titled: “A Tale of Two Economies and the Myth of Recovery”
http://jessescrossroadscafe.blogspot.com/2010/01/tale-of-two-economies-and-myth-of.html
You have to wonder if the commenters here worry that the bowling alley will run out of points before it can award them a strike. It’s spelled F-I-A-T. Everyone here is talking as if we’re still on the gold standard. The federal government does not tax or issue debt to pay its bills. Period.
During the Iraq excursion, where were the bond market vigilantes? When the TARP was paid, where were the bond market vigilantes? If spending money then didn’t precipitate a catastrophe, why will spending money now?
If regulators suffer from regulatory capture, I guess many of you must suffer from neo-classical economics capture.
I am not an economist. I’m just working on the principle that anything that leads to absurd conclusions must be wrong. In particular the idea that wealth can be created out of thin air is a myth. Fiat currency is a zero sum game. Yes, the government has the power to create money but it’s not creating wealth by doing so, just reallocating it. It’s an implicit tax on holders of US dollars and dollar denominated assets.
I have the same issue with Iraq and the TARP. The reason the US gets away with it at present is due to the reserve currency status of the US dollar, but there’s a limit to how much of a premium you can extract for that before people start looking for alternatives. Wealth redistribution via unfunded spending is a dangerous game.
Alternatively if the article was advocating the elimination of Social Security and Medicare then it should just say that, instead of pretending that we can have it for free.
Chris,
Your fear is misplaced. Recognizing how the economic system works isn’t pushing an ideology.
The very same persons profiting enormously from the current federal deficits are the ones who want you to think deficits are going to destroy the economy. While they’ve got one side of their mouth in the deficit trough, they’re squealing about high deficits through the other side of their mouth. This is all done because it keeps their proportion of the wealth high.
If all debt were extinguished what financial assets would be left? The unfunded federal deficit and that is all. It’s simple accounting. If we eliminate the accumulated unfunded federal deficit there would be zero net financial assets in the system. Every financial asset would have a corresponding debt. How does that make everyone wealthier?
It’s ironic that many people here blast neo-classical economists and yet the same people allow the entire dialogue to be shaped by neo-classical economists’ ideas.
my proposal included having the tsy, and not that it matters operationally, make the payroll taxes for us to keep the accounting straight.
Stephanie is exactly right.
Taxes function to regulate agg demand, not to raise revenue.
All the irs does is change numbers down in your bank account when it taxes. it doesn’t get anything. nor does the govt (on a consolidated basis, self imposed constraints aside)use up anything when it spends- it just changes numbers up in our bank accounts.
the US govt neither has nor doesn’t have dollars. it’s the scorekeeper for the dollar.
get over it!!!
thanks warren!
Dear Yves,
Have you gotten a chance to visit the “alternative” World Economic Forum website?
http://www.we-forum.org/en/events/AnnualMeeting2010/schwab.shtml
I think one of your commenters got it right. It’s hard to express irony and sarcasm in a blog format.
Just as the fake WEF website is a wonderful product of The Yes Men, I’m sincerely hoping that the inclusion of Stephanie Kelon’s “views” here was for the sake of humor.
More on the Yes Men: http://theyesmenfixtheworld.com/
***
Without any irony whatsoever I would make a counter-proposal to Professor Kelon’s crackpottery.
I propose a return to a progressive income tax in this nation. The top rate in Eisenhower’s years in the White House was 90%. That rate should also be applied across the board to capital gains, both long term and short and we should eliminate the reactionary bias against the working class that the privileged treatment of capital gains implies.
Furthermore, we should immediately roll back the ruinous tax breaks imposed during the mal-administration of George W. Bush. This is a large part of the reason we are running such ruinous deficits at present.
A Tobin tax should immediately be imposed on the rapacious and socially non-beneficial hypertrading in equity and other tradable markets.
Windfall taxes, just like we used to impose on the oil and other industries should be imposed and benefit provided to taxpayers who have been gouged by corporations in order to net outsized profits.
War profiteering should be reined in with Congressional investigations, DoJ prosecutions, severe clawbacks and restitution. All wars of choice such as Afghanistan and Iraq, etc. should be declared to be not in the national interest. The military/security complex should be severely shrunk to a level that it could actually be considered useful to society instead of as a malevolent form of parasitism.
Finally, I’m reminded of Richard Nixon’s plan for a reverse income tax, or credit. What a lovely idea that if society fails to make it possible for you to live above the poverty line that society will prop you up to a decent minimum standard of living. That sure beats the hell out of an immoral society that tolerates the rapid development of a homeless class while also providing the richest compensation in the history of the planet to a bunch of psychotic, conscience-free freaks on Wall Street.
Gosh, I think I’ve gotten way too serious here. Sorry for the last few paragraphs. Pure fantasy stuff, I’m assured by almost everyone. But such a lovely fantasy, eh?
A buck is a buck.
Tax all cap gains as income in the year they are realized.
Simplifies things too.
As to O man’s speech: part of me was secretly hoping for a Castroesque 300-minute harangue, just to stun the chattering classes with the unexpected length while he had their attention (the contents would have been irrelevant of course, as with Castro’s harangues: but the possibilities for such a display of oratorical style in the US media space intrigues me).
I mean, just for the fun of it.
For the sheer rhetorical possibilities of a five-hour state of the union speech.
As an aside, this must be a recent TV & radio thing, this state-of-the-union address tradition: for Clinton has the longest on record, at 81 minutes…I would have thought that had it been a thing of the previous centuries, there’d be some 19th & 18th C examples of a multi-hour address.
But there are not.
This would have been the perfect speech:
“My fellow Americans. Tonight I announce the end of all government in these United States. Over the next six months we will work feverishly to privatize all legitimate services that the government provides, while just eliminating the hundreds of non-legitimate services. Never again in these United States, scratch that, in America, will any group be given any legitimate right to coerce you or take your property. From this day forward, you and I and all born into this great country will be sovereign individuals, free to own and use your property as you see fit. And with that Freedom will come the responsibility to take care of you and yours, no more government teat to suck on. A new Law will rule the land, one based solely on the Principle that no one has the right, not even a so-called government, to aggress against any one else. My fellow Americans, tonight will go down in history as the beginning of a new era, and the birth of a new Nation of truly free peoples, and I have no doubt that this new Nation will be the greatest Nation this world has ever seen. Thank you.”
Lets see. Some people claim Social Security and Medicare are in such dire straits that we need an Entitlements Commission RIGHT NOW.
So what does Professor Kelton propose as short term fix for the economy? BLOW A HUGE HOLE IN SOCIAL SECURITY’s cash flow!!
At this point in time almost every cash dollar flowing to Social Security is flowing right back out the door in the form of benefit payments to retired and disabled workers (the difference at this point mainly being accrued interest). Proposing a payroll tax holiday for a short term emergency makes the same kind of sense that borrowing on your retirement plan or your insurance policy every time they show a positive cash balance. Shortsighted only begins to describe it.
Every time you see some person, well intentioned or not suggest payroll tax holidays or payroll tax offsets for some other tax realize they are proposing an assault on what increasingly looks like the only reliable source of retirement income for working class Americans.
That Professor Kelton proposes all out electoral assault on anyone who would dare protect financing for Social Security shows possession of a pretty big set of blinders coupled with tunnel vision.
Social Security is not really in any kind of existential crisis to start with, most of this is just what Dean Baker called it in his 1999 Book “Social Security: the Phony Crisis”. But there is no better way to turn a phony crisis into a real one than by diverting $10s of billions of dollars away from Social Security.
LEAVE SOCIAL SECURITY ALONE. And I don’t care that your intentions are good, you don’t know what the —- you are doing here. (Fill in the blank, its a family blog.)
suggest you read warren mosler’s comment above. what you are saying here is just wrong as a matter of fact. future social security payments are not funded by today’s taxes.
Obama unveiled a new cunningly brilliant jobs bill that involves extending unemployment benefits for up to 2 years, as well as the usual union pork.
Welfare and unnecessary road projects.
ouch…..
Gotta be about the stupidest commenters here I’ve ever seen. Learn some accounting, people.
Agree, too much stupid to even argue with.
Liquidation here we come.