Suitably Flip

What Else Can We Get For Our $1.2 Trillion?

Barack Obama has made it to the shopping round on Wheel Of Fortune, having banked an impressive $1.2 trillion in buying power.  The studio is filled with glamorous prizes, though he can always decide to put that balance "on account" and not fritter it away on needless home furnishings.

Still, that T-note is burning a hole in his pocket and he's keen to unload it.  The audience is cheering for the dinette set, the Barbados getaway, or the collection of sparkling pendants made of precious metals that might even appreciate in value.

Deaf to their cries, it looks like the contestant is about to go for the plastic camper with the faux wood grain.

In response to my previous post, visually comparing the "stimulus" bill to our country's other grand adventures (the moon, the New Deal, Iraq, etc.), Ace wrote to ask how much of a federal payroll tax holiday we could buy with that $1.2 trillion (the total including interest on incremental borrowing) and how much of a jobs boost that might give us.

Well, let's do the math.  GDP in 2009 will come in at around $14 trillion (assuming a -2% nominal output growth for the year).  If federal payroll taxes hold at approximately 6.5% of GDP, they will total $910 billion.  Half of this is withheld from employees (including the self-employed), while the other half is paid by their emlpoyers.  Between Social Security and Medicare, the employer's share of the load adds up to 7.65% of gross compensation (up to the annual maximum per employee).

Excusing employers from paying this tax would cost an estimated $455 billion per year (ignoring the growth effect of removing hiring disincentives).  With $1.173 trillion to play with, you could fund a payroll tax holiday for more than 2.5 years.

Rep. Louie Gohmert (R-TX) has proposed something similar, but he's only looking for a two-month holiday.  He'll be delighted to hear we can stretch it for more than 30!

Extrapolating from estimates by Heritage's Center for Data Analysis, a 1-point change in the payroll tax rate ratchets the pace of job creation by 147,000 per year.  Eliminating the employer-side payroll tax completely would be a 7.65-point reduction.  Acknowledging that the delta of 147,000:1% wouldn't be static the whole way down, using that as a general guide gets us to 1.12 million incremental jobs per year.

Over 2.5 years, that's good for more than 2.8 million new jobs.

Yes, that's lower than the President's most recently upgraded "create or preserve" estimate, but ours has the benefit of being neither pulled from thin air, nor based on a discredited theory of economics.  Plus - as briefly noted above - our estimate ignores the inevitable growth effect of lowering the cost of doing business.  Businesses will be able to add more jobs, get more done, ship more things, and earn higher profits (which increases corporate and individual income tax revenues, thus partially offsetting the cost of the tax holiday).

If per capita GDP remains constant at $45,700 and assuming a 28% average effective individual tax rate, those 2.8 million new jobs would account for $45 billion in incremental tax revenues during the 2.5 year payroll tax holiday and $18 billion per year thereafter.  Over the 11-year duration of proposed stimulus outlays, this would haul in an extra $207 billion.  The above analysis doesn't include incremental borrowing costs associated with the tax holiday, but this incremental individual income tax revenue would offset most of it.  Incremental corporate tax revenues (owing to incremental corporate profitability) would likely offset the rest, with room to spare.

It's also worth noting that these 2.8 million new jobs would all be private sector jobs generated in the free market, which is significantly more advantageous and productive than conjuring up jobs by swelling the ranks of government agencies and/or empowering a handful of lawmakers to pick winners and losers among the prviate sector.

But we're not going to get millions of private sector jobs generated in the free market.  Because we're not going to get a payroll tax holiday (or any other genuine tax relief).

We're going to get a trillion-dollar camper with faux wood grain.

Previously:  Stimulus, Illustrated

Comments

What Else Can We Get For Our $1.2 Trillion?

Barack Obama has made it to the shopping round on Wheel Of Fortune, having banked an impressive $1.2 trillion in buying power.  The studio is filled with glamorous prizes, though he can always decide to put that balance "on account" and not fritter it away on needless home furnishings.

Still, that T-note is burning a hole in his pocket and he's keen to unload it.  The audience is cheering for the dinette set, the Barbados getaway, or the collection of sparkling pendants made of precious metals that might even appreciate in value.

Deaf to their cries, it looks like the contestant is about to go for the plastic camper with the faux wood grain.

In response to my previous post, visually comparing the "stimulus" bill to our country's other grand adventures (the moon, the New Deal, Iraq, etc.), Ace wrote to ask how much of a federal payroll tax holiday we could buy with that $1.2 trillion (the total including interest on incremental borrowing) and how much of a jobs boost that might give us.

Well, let's do the math.  GDP in 2009 will come in at around $14 trillion (assuming a -2% nominal output growth for the year).  If federal payroll taxes hold at approximately 6.5% of GDP, they will total $910 billion.  Half of this is withheld from employees (including the self-employed), while the other half is paid by their emlpoyers.  Between Social Security and Medicare, the employer's share of the load adds up to 7.65% of gross compensation (up to the annual maximum per employee).

Excusing employers from paying this tax would cost an estimated $455 billion per year (ignoring the growth effect of removing hiring disincentives).  With $1.173 trillion to play with, you could fund a payroll tax holiday for more than 2.5 years.

Rep. Louie Gohmert (R-TX) has proposed something similar, but he's only looking for a two-month holiday.  He'll be delighted to hear we can stretch it for more than 30!

Extrapolating from estimates by Heritage's Center for Data Analysis, a 1-point change in the payroll tax rate ratchets the pace of job creation by 147,000 per year.  Eliminating the employer-side payroll tax completely would be a 7.65-point reduction.  Acknowledging that the delta of 147,000:1% wouldn't be static the whole way down, using that as a general guide gets us to 1.12 million incremental jobs per year.

Over 2.5 years, that's good for more than 2.8 million new jobs.

Yes, that's lower than the President's most recently upgraded "create or preserve" estimate, but ours has the benefit of being neither pulled from thin air, nor based on a discredited theory of economics.  Plus - as briefly noted above - our estimate ignores the inevitable growth effect of lowering the cost of doing business.  Businesses will be able to add more jobs, get more done, ship more things, and earn higher profits (which increases corporate and individual income tax revenues, thus partially offsetting the cost of the tax holiday).

If per capita GDP remains constant at $45,700 and assuming a 28% average effective individual tax rate, those 2.8 million new jobs would account for $45 billion in incremental tax revenues during the 2.5 year payroll tax holiday and $18 billion per year thereafter.  Over the 11-year duration of proposed stimulus outlays, this would haul in an extra $207 billion.  The above analysis doesn't include incremental borrowing costs associated with the tax holiday, but this incremental individual income tax revenue would offset most of it.  Incremental corporate tax revenues (owing to incremental corporate profitability) would likely offset the rest, with room to spare.

It's also worth noting that these 2.8 million new jobs would all be private sector jobs generated in the free market, which is significantly more advantageous and productive than conjuring up jobs by swelling the ranks of government agencies and/or empowering a handful of lawmakers to pick winners and losers among the prviate sector.

But we're not going to get millions of private sector jobs generated in the free market.  Because we're not going to get a payroll tax holiday (or any other genuine tax relief).

We're going to get a trillion-dollar camper with faux wood grain.

Previously:  Stimulus, Illustrated