Payroll Tax Holiday a Poor Stimulus Idea

[LiberalFighter]

"Making Work Pay" Credit a Better-Targeted Alternative

Biggest Tax Benefits from Payroll Tax Holiday Would Go to Workers Least Likely to Spend Them

Economic stimulus measures aim to encourage an immediate increase in aggregate demand by boosting consumer spending. The most efficient way to boost consumer spending is to put money into the hands of people who will spend it quickly rather than save it; tax cuts focused on moderate- and low-income households are more effective as stimulus than tax cuts that are larger for people with higher incomes, because people at low-income levels spend a larger share of tax cuts they receive than people at higher income levels do.

A payroll tax holiday does not score well on this front — too little of the benefit goes to lower-income households struggling to make ends meet and too much goes to higher-income taxpayers, who are likely to save a significant fraction of any new resources they receive. Under the payroll tax, employees pay tax of 6.2 percent on earnings up to $106,800. So, for example, a worker earning $10,000 would receive a tax cut of just $103 from a two-month payroll tax holiday, while a worker earning ten times as much ($100,000) would receive a tax cut ten times as big — $1,030. Indeed, the highest-income fifth of households could receive more than half of the benefits that would go to workers from a two-month payroll tax holiday.<2>

A better way to boost consumer spending through a tax cut is President-elect Obama’s proposed Making Work Pay credit, which would offset the worker’s share of payroll taxes for the first $8,100 in earnings. Worth up to $500 per worker, it would cost about $70 billion in 2009. This is roughly equivalent to the revenue from a one-month payroll tax holiday.

Source: Center on Budget and Policy Priorities

[niceypoo]

1. Tax cuts don't stimulate

Tax cuts caused most of the problems we are in now

[stray cat]

2. not housing melt down, or wallstreet or jobs

[ProSense]

3. "A better way to boost consumer spending through a tax cut is President-elect Obama’s

proposed Making Work Pay credit"

From the OP link:

<...>

The proposed payroll tax holiday would apply to the employer’s share of the payroll tax as well as the employee’s share. (Each share amounts to 6.2 percent of eligible wages.) Suspending employees’ payroll taxes would immediately translate into higher take-home pay for workers. Suspending employers’ payroll taxes, by contrast, would put cash into companies’ coffers, where it is likely to sit as long as sales are weak and factories are operating below full capacity. Indeed, according to the Congressional Budget Office, suspending employer’s payroll taxes is “not a particularly cost-effective method of stimulating business spending: Increasing the after-tax income of businesses typically does not create an incentive for them to spend more on labor or to produce more, because production depends on the ability to sell output”.<4> In other words, firms will not hire (or retain) more workers than it takes them to produce the goods and services they can sell. Simply giving them a general tax break is unlikely to affect their hiring or investment in most cases, and thus would be largely ineffective as stimulus.

<...>

Yeah, that's from January 2009, and the argument is for the MWP credit over a payroll tax credit split between employers and employees.

Here is CBPP's statement on the current deal.