Wednesday, December 04, 2002

Sen. John Kerry (D-Ideopolis) - He’s now being touted as Tsongas 2.0 ; here’s the outline of his economic plan as laid out in a Cleveland speech yesterday.
He proposed allowing businesses a one-time break from their share of payroll taxes for every new employee they hire and for any raise they give to current employees. He also proposed eliminating the capital gains tax on the first $100 million worth of stock issued by technology companies and allowing small businesses to defer up to $250,000 of federal taxes if the money is reinvested in the business. In a nod to his party's political base, the senator also proposed helping employees by providing a one-year rebate on the 7.65 percent share they pay in payroll taxes to support Social Security and Medicare. Employers provide the other half. He said the savings would amount to $765 per worker and $1,530 for a two-income family. In addition, Kerry suggested extending unemployment benefits for 820,000 families that are due to expire three days after Christmas, raising the federal minimum wage by $1.40 to $6.55 per hour, and expanding the Earned Income Tax Credit, which especially benefits the working poor.
The first part is a pitch to the high-tech intelligentsia (the Ideopolis of The Coming Democratic Majority hypothesis) that is a swing voting block. The denizens of the tech firms are libertarian leaning as a group; they’re amenable to the permissive morality of the Democrats but they like low taxes as well. If you took that capital-gains exemptions and made it applicable to all new firms, you might get me interested, but this sounds a bit too much like industrial policy, with the tax breaks going to favored industries (watch to see how “technology” is defined). I’d even be interested in pursuing that tax-deferral idea for small business. Cato folks could agree to the first paragraph if you opened it up to non-tech firms. It looks like some good aggregate-supply boosting stuff that would give the economy a solid long-term boost. However, he veers off into Keynesville from there on. Temporary tax cuts for employers and employees won’t help the economy much. Giving employers a one-time 7.65% kickback on new hires and raises won’t help boost employment much, especially if it is offset by higher taxes or higher costs of capital to pay for all this. The personal FICA reductions look to be targeted at the first $10,000 of income ($765= $10,000*0.0765), so that won’t encourage anyone but the lowest-income workers to work harder. The temporary nature of the tax breaks will tend to have people more likely to save it, as they won’t change their buying habits much unless it is a permanent take-home pay hike they can count on for the long haul. Kerry must have one or more of the following three assumptions. First, that the economy is in a recession and that demand needs to be goosed. Second, that people tend to spend one-time tax cuts. Third, this is a good class-warfare game to get the poor folks on his side without ticking off the middle class. It might be a combination of the above. I wouldn’t mind an extra $65/month in my paycheck for a year, but there are better and more simulative ways to do a tax cut. It might be good politics, but it’s lousy macroeconomics. Yes, that could apply to the Bush $250 rebate checks too, but those checks were harbingers of long-term tax rate cuts rather than a one-shot deal; the Bush package as a whole was solid macroeconomics. The EITC proposal has some merits; at least it rewards low-income workers for bringing in more of a paycheck, although it has a discouraging effect for workers on the upper edge of the working-poor where the EITC credit is being phased out. It has more of a positive effect for the working poor than a minimum wage increase, which will eliminate some jobs that are worth doing at $5.15/hour but might not be worth doing at $6.55/hour. However, both don’t do much to stimulate the economy. Where will the $100 billion or so of lost tax revenue come from? Higher interest rates and/or higher upper-bracket tax hikes needed to offset the lost revenue will quickly offset any benefits from the business tax breaks. You then will have a long-term drain on aggregate supply from the costs of the tax cuts and from the minimum wage increase without having any long-term benefits to aggregate supply. Tech firms will have a lower cost of capital, but the rest of the economy will have inflationary pressures and higher interest rates to content with. The poor and the propeller-heads might like this one, but it’s not good for the commonweal, folks.

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