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Tax Cut Extension May Be Tough Sell

September 8, 2011
Wall Street Journal

President Barack Obama's push to extend the payroll tax holiday to spur economic growth may not be an easy sell, in part because some economists and lawmakers question if it's delivering enough bang for the buck.

In his speech to Congress Thursday, Mr. Obama is expected to lay out an economic plan with a price tag of $300 billion or more that includes extending the two-percentage point reduction in Social Security payroll taxes paid by employees and reducing the employers' share.

The tax cut reduced an employee's share of the Social Security payroll tax to 4.2% from 6.2% for 2011, at a cost to the government of $111.7 billion.

Some economists say the payroll tax would likely provide a small boost to growth by increasing the amount of cash workers have to spend, putting an extra $1,000 in the average worker's pocket this year. In theory, that extra spending should prompt more hiring to meet the extra demand for goods and services.

But some analysts and lawmakers doubt whether it works as advertised, and is worth the added government burden at a time when Washington is trying to tame the federal budget deficit.

"It's hard to see that it's really been an effective policy," said Martin A. Regalia, chief economist at the U.S. Chamber of Commerce. "If you're not going to be able to put a policy together that has a chance of working, let's not make the deficit any worse."

Some Republicans dismiss the tax holiday as a short-term gesture. "What our economy needs are permanent changes in regulatory and taxation policy, not one-year fixes," said Sen. Lamar Alexander (R., Tenn.).

The economic effect of the tax cut wasn't as clear as some had hoped. A Goldman Sachs analysis showed the average personal income tax rate barely dropped at the beginning of 2011, in part because the payroll tax holiday was offset by the expiration of the Making Work Pay tax credit, a refundable credit worth up to $800 for married couples.

In contrast, Macroeconomic Advisers projects that extending the tax cut for another year would increase U.S. employment by 400,000 jobs next year and add half a percentage point to the pace of economic growth, at a cost about $120 billion.

While critics say the gains are too meager, supporters say the government must do whatever it can to revive the sluggish economy, which added no net new jobs in August, leaving unemployment stuck above 9%.

The nonpartisan Congressional Budget Office expects the economy to grow at a modest 2.7% annual rate, fourth quarter to fourth quarter, in 2012, assuming the payroll tax cut expires as scheduled at the end of this year. CBO expects unemployment will be 8.5% in the fourth quarter of 2012.

Supporters believe that lowering employers' costs could prod some to add workers.

"When you cut the employer side it's more of a direct incentive to hire people," said Ted Wieseman, a Morgan Stanley economist.

But skeptics argue that the tax cut won't influence employers who are reluctant to hire because demand is so weak and the economic outlook uncertain. The cut could merely increase company profits, they said.

Mr. Obama, facing grim economic projections and low approval ratings as he prepares to run for re-election, is expected to propose other jobs-related measures in his speech Thursday. These include increased government spending on physical infrastructure and aid to state and local governments.

That should cheer liberals who are calling for more government action. "The government needs to spend more money just directly to build things," said Chuck Marr, a tax policy expert at the left-leaning Center on Budget and Policy Priorities. The organization supports extending the payroll tax cut but has said other options, such as refundable tax credits that are more beneficial to low-income workers, are better tools to boost growth.

The White House does not expect Congress will adopt every proposal Mr. Obama puts forward in his speech Thursday night, but he will argue that the struggling economy clearly needs fresh assistance and that doing nothing would be detrimental, according to Democratic officials familiar with the president's plans.

Mr. Obama will say he's committed to long-term deficit reduction and will offer ways to pay for his proposals over time, presenting them as complementary efforts, the officials said.

Congressional Republicans say they want to reduce government spending, not increase it. But it's not clear whether they would reject extending the payroll tax cut.

"The payroll tax holiday, if you will, is something that I supported in the last agreement," House Majority Leader Eric Cantor of Virginia said Wednesday. "I've always said probably [there are] better ways to focus on small business growth, but as you know Republicans are not for increasing taxes. It's something I've supported in the past and this will be part of the discussions ongoing."

Senator Scott Brown (R., Mass.) said in a statement he supports extending the payroll tax cut and expanding it to include employers. "This is a policy that we should all support, and we should also explore ways to make payroll tax relief available to businesses that hire new workers," he said.

"While these are some short term policies that can help our country now, to avoid continued high unemployment, we also need long term policies that will get our companies hiring again."


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