Jon Kyl announced yesterday that he could not support the extension of the cut in Social Security Taxes. Now 1st let me say that I was never a big fan of this approach for reasons that have nothing to do with Economics 10 theory that I am about to review, but I have given in to this logic at this time since the Congress passed this in a bipartisan manner.
Now for what upsets me about what Jon Kyl said.
He wants to end this tax reduction because he believes it did not create any jobs. No tax policy creates jobs directly so this is not the proper analysis. Tax Policy affects Demand or Supply. Changes in Demand affect jobs.
So what does Senator Kyl propose? He wants to end this tax cut which does increase demand by giving every worker in the economy about $1000 more per year in their take home pay. Now while the higher income people probably just saved this additional take home pay (I know I did), lower and middle income people spent it. Reducing demand will reduce jobs.
Instead, he wants to cut the taxes of those who create jobs by limiting income taxes on the higher income people. But this will not stimulate demand. It will just increase the take home pay of the higher income people who will likely just save it as I did for my reduced FICA taxes. Higher income people do not change their base consumption patterns because their take home changes. Their savings rate goes up or down and perhaps their marginal luxury consumption changes.
What would incentivize a higher income person to create jobs? Well, demand for their products or services need to go up. It doesn't matter that their marginal tax rate is 28%, 31%, 35%, or 39%. They will create a job if demand for the product or service is there and if demand is not there, they will not create the job.
So what policies increase demand? The answer is policies that increase consumption of goods and services. This is classic Keynesian economics (and please remember I am primarily a believer in monetary economics in most instances) and our current situation is when Keynesian economics is to be relied upon. The government should be increasing consumption by spending money on infrastructure spending and paying for it by raising revenues from those who can afford it. We need less saving by the wealthy right now and they have been the primary beneficiaries of the Bush tax cuts. It is time for them to support the government that keeps them safe and provides the services that keep the country running.
Unfortunately, many of the unemployed need housing to come back. So the other thing that could be done is some comprehensive solution to the empty housing stock situation. I have seen a lot of ideas and I am beginning to think just knocking down any foreclosed house that has not been sold in 360 days is a good idea. RMBS holders might object however.
Finally, Grover Norquist who promotes this Republican nonsense gets 3 Pinocchio's from the Washington Post fact checker. It is rare that he gives out 3 noses.
http://www.washingtonpost.com/blogs/fact-checker/post/grover-norquist-a-misleading-accounting-of-recent-history/2011/11/27/gIQAAhER2N_blog.html?hpid=z3
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