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Lindsey: Slash Social Security Tax By Half

By Gene J. Koprowski   |   Monday, 29 Dec 2008 03:38 PM

Former Federal Reserve Governor Lawrence B. Lindsey suggests that the federal government immediately slash the Social Security tax by half as a way to give the U.S. economy a quick stimulus — one which will impact economic growth more quickly than new government spending plans.

Economic growth is stagnating because consumers, made anxious by the bad business news of the last few months, have increased their savings dramatically. Lindsey, an economist, served as an economic advisor to President Bush in 2001 and 2002 and counseled the first Bush tax cut, as well as serving under Reagan and George H. W. Bush.

He now says research suggests that the U.S. household savings rate is "likely to rise by roughly 7 percentage points, from roughly one-half of one percent of disposable income to between 7 and 8 percent" next year.

"The majority of this adjustment is likely to occur well before the end of 2009, with some further modest increase thereafter. Our estimate suggests a drop in consumer demand of roughly $500 billion in 2009 and a further drop of roughly half that figure in 2010," Lindsey writes in The Weekly Standard.

"These frame the quantitative parameters for an appropriate fiscal stimulus."

This consumer cash would normally be used for spending on purchases of cars and luxury goods and on second properties, like condos. Research by Robert Sheridan & Partners in Chicago shows developers have been slashing prices but still sit on stacks of empty condos.

Lindsey notes that the bulk of government spending programs that have been suggested by President-elect Obama's team involve transfers of federal resources to state and local governments.

"While any or all of these programs might qualify as meritorious in their own right, they collectively fail the tests of well-targeted stimulus," Lindsey says. "Note first that such spending programs do not directly address the household balance-sheet problem."

Permanent tax cuts offer a much better option, Lindsey said. The incoming chairman of the Council of Economic Advisers for Obama, Christina Romer, has estimated that the macroeconomic benefits of tax cuts can be two to three times larger than estimates of the benefits related to spending increases.

The focus of any Obama tax cut should be employment taxes, in particular a permanent halving of the current 12.4 percent Social Security payroll tax on the first $106,800 of wages, split evenly between workers and employers, Lindsey says.

"The direct revenue effect of that would be a bit under $400 billion per year, roughly in line with the present quantitative needs of the economy," he says.

"The funds would flow directly to households through higher take-home pay and indirectly through a reduction in the cost of employment. Economic studies conclude that the benefits of a reduction in the employer portion of the payroll tax are ultimately received by employees," Lindsey added.

The immediate effect would be an improvement in the cash flow of credit-starved businesses — as well as being a marginal incentive to keep employment up.

"The funds would be extremely timely, with the benefits hitting the economy with the first paycheck after the plan was implemented," said Lindsey.

"By lowering the taxation of labor, the plan would help produce a higher-employment recovery than would otherwise be the case."

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Former Federal Reserve Governor Lawrence B. Lindsey suggests that the federal government immediately slash the Social Security tax by half as a way to give the U.S. economy a quick stimulus — one which will impact economic growth more quickly than new government spending...
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