Earlier this year, John McCain and Hillary Clinton tried to put some life into their respective campaigns by endorsing a gas tax holiday that would have lasted for the entire summer. As I noted back then, the proposal made almost no economic sense and would have likely resulted in no real savings for the public.
Now, a Republican Congressman is proposing a tax holiday for the entire nation:
Rep. Louie Gohmert (R-Texas), a member of the conservative House Republican Study Committee, proposes to use the $350 billion left of the $700 billion bank bailout to fund a two-month tax holiday that would put money in the pockets of American taxpayers.
(…)
Gohmert’s tax holiday plan is elegant in its simplicity: every American taxpayer would pay no federal income or FICA taxes for the first two months of 2009. For the typical American family — earning about $50,000 a year — that would mean they would keep about $2000 that would otherwise be paid to the government.
Gohmert’s plan doesn’t pay for Wall Street bonuses or let banks use bailout money to buy other banks or pay dividends. It doesn’t rely on bureaucrats to pay money out to the right people at the right time or try to stimulate the economy with token payments to people who don’t pay taxes.
Most Americans pay about 25 percent of their income in federal income tax and another 7.25 percent in FICA (social security and Medicare taxes). Computing how much money Gohmert’s tax holiday would leave in your family’s checkbook is very simple.
Take your monthly income (the gross amount shown on your pay stubs before tax and any other withholding) and multiply it by .66. That amount is roughly what Gohmert’s two-month tax holiday will leave in your pocket.
For someone earning $ 50,000, that would be an additional $ 2,750 in their pocket.
As much as I like the idea of not having to pay taxes, I think Norm Leahy gets it right when he points out the problem with Gohmert’s idea:
[A]s with any tax holiday, the benefits expire after a brief time…and thus will most likely fail to change personal incentives to either spend or save. The government loses revenue (which will have to be made up somewhere…because we all know that spending will not be reduced by the same amount of the tax break…and that means more borrowing now, higher taxes later, or both at some point).
Much like the economic stimulus checks, which clearly didn’t keep us out of a recession this year, I wouldn’t expect this two month tax holiday to have any real impact on the economy.
![[Post to Twitter]](http://belowthebeltway.com/wp-content/plugins/tweet-this/icons/tt-twitter-micro4.png){kind=icon}
![[Post to Digg]](http://belowthebeltway.com/wp-content/plugins/tweet-this/icons/tt-digg-micro4.png){kind=icon}
![[Post to Ping.fm]](http://belowthebeltway.com/wp-content/plugins/tweet-this/icons/tt-ping-micro4.png){kind=icon}
![[Post to Reddit]](http://belowthebeltway.com/wp-content/plugins/tweet-this/icons/tt-reddit-micro4.png){kind=icon}
![[Post to StumbleUpon]](http://belowthebeltway.com/wp-content/plugins/tweet-this/icons/tt-su-micro4.png){kind=icon}
December 1st, 2008 at 10:11 pm
A family earning $50K is not paying 25% in taxes. And the FICA rate is 7.65%, not 7.25%.
December 1st, 2008 at 10:14 pm
In that case, the tax holiday makes even less sense
December 1st, 2008 at 11:20 pm
Doug, this proposed tax holiday would be a larger and more efficient stimulus than anything else proposed thus far.
chsw
December 2nd, 2008 at 7:18 am
Well, let’s look at this objectively. We know that at a minimum, any stimulus bill is going to total 350B, and very probably much more (700B is the number being kicked around). Let’s consider some likely options for this money:
1.) Keynesian-style infrastructure spending. While I can think of some pretty good projects for this (health care infrastructure comes to mind, given the fact that we’re apparently going to put 40+ million uninsured into the system in the near future), by the time you get these projects off the drawing board and awarded we’ll probably be on the way to recovery. In other words, the prospects for immediate relief are slim.
2.) Stimulus checks. If history is any guide then these would take several months to work into the system to provide a slight uptick in consumer activity lasting about two months. This isn’t very good velocity for little benefit.
The tax holiday idea is interesting because it touches businesses and individuals alike. It’s not quite true that the FICA rate is 7.65 - that’s simply the rate you and I see. The employer picks up the other half, bringing the total up to ~15%. A holiday from this would have the effect of both putting more money into the pockets of the consumer and increased capital formation in the private sector.
Is it a be-all-end-all? No. We could get more creative and mess around with long term cap gains (something like 5% on issues bought and held for a minimum of 24 months) but that’s probably too much to hope for.
But we should assume that the money is going to be spent anyway, and funding something like this is probably a good idea if your aim is providing immediate relief.
December 2nd, 2008 at 1:13 pm
This would be a wonderful idea. First, it wouldn’t be taking ANYTHING from Government funding as it simply uses the remaining bailout money they have already allocated to begin with, and it puts instant liquidity into banks and the marketplace, which is what they have been trying and failing to do. We all got screwed on the bailout bill, this would be a great way to at least soften the blow the American Taxpayer has already felt from this failed policy.
December 3rd, 2008 at 9:12 pm
If the economy keeps going the way it is, there will not be any taxpayers left to pay any taxes. It sure would help if we could just keep American jobs in America instead of outsourcing. Then we would have this problem to deal with.
December 4th, 2008 at 10:35 am
I love how any idea other than the ones coming out of the take no action congress are considered gimmicks! If those two hour a day government employees (congress) would be a little more creative and less interested in their political debts, maybe something could get accomplished!!