Political Correction

Republicans: Payroll Tax Holiday Isn't "Stimulating" Enough

December 12, 2011 12:11 pm ET

A prominent group of Republican lawmakers are opposing Obama administration efforts to extend a payroll tax holiday — due to expire on December 31 — that would continue putting more money in the pockets of working Americans. Opponents lean heavily on the argument that the current payroll tax holiday has not had a sufficiently stimulative effect on the economy, but experts disagree, arguing that the holiday has helped bolster the recovering economy.

CLAIM: Payroll Tax Holiday "Hasn't Helped To Turn The Economy Around"

Rep. Michele Bachmann: Payroll Tax Holiday "Hasn't Helped To Turn The Economy Around." On CNN's State of the Union, GOP presidential candidate Rep. Michele Bachmann (MN) told host Candy Crowley:

And you also have to remember, Candy, the president's reason. He said he wanted to lower that - the payroll tax cut because it would create jobs. Even the administration admits it didn't create jobs. It hasn't helped to turn the economy around. As president of the United States, I know what to do to turn the economy around. I'm a former federal tax lawyer. I created and I run a successful business as a private businesswoman. I get the economy. This payroll tax deduction didn't do what President Obama promised he would deliver that it would do. [CNN, State of the Union, 12/4/11]

Sen. Jon Kyl: "The Payroll Tax Holiday Has Not Stimulated Job Creation." From an appearance by Sen. Jon Kyl (R-AZ) on Fox News Sunday:

CHRIS WALLACE (HOST): If I may, Senator Kyl, just to cut this short, are you saying no deal on extending payroll tax cuts?

KYL: The payroll tax holiday has not stimulated job creation. We don't think that is a good way to do it. Before the end of the year, we will have discussions about what we're going to do on all these different programs. [Fox News Sunday, 11/27/11, via FoxNews.com]

Sen. Orrin Hatch: Payroll Tax Holiday "Proven To Be Ineffective" At "Stimulating Economic Growth." From the Salt Lake Tribune:

Republican leaders in the House and Senate say they support extending a temporary payroll tax cut that has provided Americans with a little more spending money in a bad economy.

But Sen. Orrin Hatch, the top Republican on the committee that writes tax policy, doesn't appear ready to support that position, arguing the tax holiday first championed by President Barack Obama hasn't worked and shouldn't be continued.

"I cannot support extending tax policies that were intended to be temporary and that have proven to be ineffective at creating jobs or stimulating economic growth," said Hatch, R-Utah. [Salt Lake Tribune, 12/2/11]

Rep. Paul Ryan: Payroll Tax Has "Already Proven To Fail." From FoxNews.com:

[Rep. Paul] Ryan also slammed the president's jobs proposal, which includes a blend of tax breaks, infrastructure spending and local government aid. While he expressed interest in one proposal to retrain the long-term unemployed, Ryan said that even the payroll tax cut component of Obama's plan is a bad idea. 

"It hasn't worked, and especially when you're taking these temporary tax rebates and paying for them with permanent tax increases, that is actually self-defeating," he said. "So, we just don't want to go with ideas that have already proven to fail." [FoxNews.com, 9/18/11]

FACT: Economist Mark Zandi Credits December 2010 Payroll Tax Cut With Helping Prevent Recession

Zandi: "Without That Payroll Tax Cut This Year, I Think We'd Be Skirting Recession Now." During a June 26, 2011, appearance on CNN's State of the Union, Moody's Analytics economist Mark Zandi stated: "On the other side of that, there are a few things I think that can be done that would make a difference in the very short term if we need it. So extending the payroll tax holiday for another year seems like a reasonable thing to do. I think that can get done politically. Without that payroll tax cut this year, I think we'd be skirting recession now because of the higher energy prices." [CNN's State of the Union, 6/26/11, emphasis added]

Moody's: Every Dollar In Reduced Revenue From Payroll Tax Cut Expands Economy by $1.27. According to the Center on Budget and Policy priorities:

The rationale for enacting the temporary payroll tax cut last December - the economy was weak and a payroll tax cut would provide a more efficient bang-for-the-buck than many other tax-cut options - has become still more compelling today, given the renewed signs of economic weakness.

At a time of soft economy-wide demand, the tax cut increases consumer purchasing power in a manner that is both substantial (boosting take-home pay by 2 percent for most workers) and modestly progressive, since the wage cap limits the benefit for higher-income families (who are more likely to save rather than spend the additional money)

Largely for these reasons, Moody's Analytics estimates that every $1 reduction in federal tax revenue resulting from an employee-side payroll tax cut expands the economy by $1.27. [CBPP.org, 9/7/11, emphasis added, internal citation removed]

CBO Director In 2010: A Payroll Tax Cut Would Add Jobs And Spur The Economy. From Congressional Budget Office Director Douglas Elmendorf's February 23, 2010, testimony before the Joint Economic Committee:

A temporary reduction in employees' portion of the payroll tax would not immediately affect employers' costs. Instead, it would have initial effects similar to those of reducing other taxes for people below the 2010 income cap. The increase in take-home pay would spur additional spending by the households receiving the higher income, and that higher spending would, in turn, increase production and employment. Those effects would be spread over time, however, and the majority of the increased take-home pay would be saved rather than spent.

CBO estimates that reducing employees' payroll taxes would raise output cumulatively between 2010 and 2015 by $0.30 to $0.90 per dollar of total budgetary cost. CBO also estimates that the policy would add 3 to 9 cumulative years of full-time-equivalent employment in 2010 and 2011 per million dollars of total budgetary cost. [Elmendorf Testimony, 2/23/10, emphasis added, via CBO.gov]

FACT: Economists Say Letting Payroll Tax Cut Expire Would Weaken Economy

CBPP: Extending Payroll Tax Cut Will Reduce Risk That The Economy Will Continue To Grow Too Slowly. From the Center on Budget and Policy Priorities:

Failure by Congress to extend the temporary payroll tax cut enacted last December would reduce all paychecks starting on January 1, withdrawing needed support from the still-weak economy. The measure, part of the tax cut-unemployment insurance deal between President Obama and Republican leaders, reduces the employee share of the Social Security payroll tax, boosting workers' take-home pay by an estimated $120 billion in 2011. The tax cut is worth $934 to the average family. (The table below gives some examples of how the tax cut's expiration would affect workers in different occupations.)

Many economists have warned that letting the tax cut expire at the end of December would slow economic growth next year. To reduce the risk that the economy will continue to grow too slowly to lower unemployment or may even slide back into recession, policymakers should at a minimum extend the tax cut. [CBPP.org, 9/7/11, emphasis added, citation removed for clarity]

EPI/Century Foundation: Failure To Extend Payroll Tax Cut Could Decrease GDP By $128 Billion And Cost Almost 1 Million Jobs. According to an issue brief from the Economic Policy Institute and The Century Foundation: "As part of December's deal to extend the Bush-era tax cuts for two years, Congress enacted a 2 percentage point reduction in the Social Security payroll tax for all workers, and it is set to expire at the end of the year. The cost of failing to extend the payroll tax cut is estimated by adjusting the cost of the 2011 payroll tax cut (JCT 2010) by CBO's projection of wage and salary growth (CBO 2011b), resulting in a cost of $117.8 billion. Applying a fiscal multiplier of 1.09 (Zandi 2010), we estimate that the failure to extend the payroll tax cut would decrease GDP by $128 billion (-0.8%) and lower nonfarm employment by 972,000 jobs. [Economic Policy Institute and The Century Foundation, 8/4/11, emphasis added]

Zandi: "Critical" To Extend Payroll Tax Holiday; Failure To Do So Will Increase Drag On Economy. According to Moody's Analytics Economist Mark Zandi: "To avoid recession, Congress and the administration must also find common ground on economic policy. If they do nothing, federal fiscal policy will shave 1.7 percentage points from real GDP growth next year. The triggers for this include the expiration of both this year's reduced payroll tax rate and emergency unemployment insurance benefits. Even a strong economy would have trouble digesting this, never mind one that is struggling to post any growth at all. [...] It is critical (and assumed in our baseline outlook) that lawmakers agree at least to extend and increase the payroll tax holiday for workers through 2012 as proposed by President Obama. This would reduce next year's fiscal drag to less than 1 percentage point-still a heavy lift for the economy, but doable. [Economy.com, 10/10/11]

Zandi: Extending Payroll Tax Cut Would Create 750,000 Jobs. From McClatchy: "The biggest contributor to job growth next year under the Obama plan would be extending the payroll tax holiday for workers, which Zandi estimates would add 750,000 jobs. The portion that is waved for employers would add another 300,000 jobs, he said. Infrastructure spending could add 400,000 jobs." [McClatchy, 9/8/11]

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