Realist, not conformist analysis of the latest financial, business and political news

The Solution To Coronavirus Stimulus

UK tax to GDP

Imagine that the coronavirus blows some grand old hole in the economy. What should be done about it?

Thus we have both theory and empirical evidence telling us the same thing. We have an economic crunch, so cut the payroll tax. Don’t spend months and years trying to spend more government money, just tax everyone less.

The really great joy of the process is that we could tell the IRS to change the withholding rules today, and the money would start to be in paychecks in only 14 days. There simply isn’t anything at all else that will work that fast. We can even do it without Congress, for Trump could say that we’ll take it all back in a few months, thus it doesn’t change the budget at all.

If we really want to make it more favorable to low-income workers, as we probably should, just exempt the first $1,000 per biweekly paycheck from payroll taxes altogether. That makes it the same amount for everyone but a much larger portion, percentage-wise, of those lower incomes.

It’s even entirely in accordance with that Keynesian theory that every Democrat says they agree with already. Therefore, it must be an excellent plan. The only people who could possibly be against it are those who would have to forgo the pleasures of determining the extra spending that government isn’t going to be doing — that joy of splashing out remains with us, the citizenry.

That is, of course, where it should be anyway.

The UK situation is mildly different. US FICA taxation starts from dollar one of earned income, we have a tax free allowance. But it’s pretty low. We also generally get paid monthly, not fortnightly. The economics works though. We’d never be able to get new spending out the door fast enough to be stimulatory, it needs to be tax cuts to manage that. So, NI it is.

There is one more point to consider. Those on low, low incomes won’t benefit from this. Those on no labour incomes also won’t. But then those on no labour incomes will already be living on benefits and those aren’t going to be cut or changed by coronavirus. So they’re not actually going to lose any income that needs to be replaced or stimulated, are they?

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4 years ago

VAT could be cut overnight, making income worth more.

4 years ago
Reply to  jgh

Doesn’t benefit those on low incomes though much though, as much of their post tax income goes on items without VAT. And probably very messy for businesses.

Cutting the 20% income tax rate from the start of the tax year would be very simple.

4 years ago

This is the dumbest thing Trump has done since tariffs, and even tariffs had a strategic purpose. Stuffing free loot in everyone’s pocket, which they will have to repay on 15-Apr-21, doesn’t make anyone feel richer, or spend more, especially if they’re staying home out of panic, which increases with each “emergency” move.

Smells like Madame Speaker’s claim that payments to people for being unemployed was the most “efficient” way to pump up the economy.

4 years ago

Just curious. The earnings taper rate of Universal Credit is 63% currently. Has anyone modelled the stimulus effect of cutting this taper rate to say 53%, like from Monday. It would benefit people in the earnings taper range for sure, which pretty much covers all lower income workers, apart from the self-employed who are netting less than the applicable amount.
Surely a simple idea. Yes, it would bring more people into range of UC, but would it act as a stimulus and would it be ‘progressive’. I think, yes.

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