Payroll Tax Breaks: Will Obama’s Plan Create Jobs?

Sep 8, 2011 6:00am

Tonight President Obama will lay out his plan to create jobs and spur economic growth. One of its provisions will be a one-year extension of the two percent Social Security payroll tax break that was enacted as part of the 2010 stimulus plan.

Last year the rate was reduced from 6.2 percent to 4.2 percent, a decrease that saved the average family of four about $1,000 per year and cost the federal government about $112 billion. It was the first payroll tax decrease since 1968.

“It will put more money in people’s pockets than they would otherwise have, and as a result they will spend more,” said Roberton Williams, a senior fellow at the Urban-Brookings Tax Policy Center. “The question right now is, How much more?”

Because the Social Security payroll tax is only collected on the first $106,800 of income, a rate reduction gives a greater boost to middle and low income workers than the country’s wealthiest residents. But, Williams said, the tax break will probably have less of an effect on consumer spending than if the $112 billion was concentrated specifically on low-income workers.

“Typically we expect people at the lower end of income distribution to spend more of every dollar coming in,” Williams said. “So it would probably be better to target money toward the bottom of the distribution. That’s not how this works. It doesn’t target the bottom end.”

But, as the Tax Foundation’s Nick Kasprak points out, a payroll tax credit is one of the only politically feasible ways to pump money back into the floundering economy.

“It’s a low-hanging fruit for Obama to take in terms of doing some sort of stimulus right now,” Kasprak, an analyst and programmer for the Tax Foundation, said. “It’s a lot easier in the current political environment to pass a tax cut than some kind of spending measure.”

House Majority Leader Eric Cantor said today that he may be open to the president’s proposal to extend the tax break that is set to expire at the end of the year.

“It is something I supported in the past,” and “will be part of the discussions ongoing,” Cantor said, adding that “Republicans are not for raising taxes.”

But with Obama’s re-election prospects hinging on the state of the economy, just how effective could a payroll tax break be in stimulating job growth?

“It won’t be,” said Curtis Dubay, senior tax policy analyst at the Heritage Foundation, a conservative think tank. “Let’s not forget it’s in place right now and the unemployment rate is 9.1 percent.”

Dubay said a better option would be, for example, permanently reducing the corporate tax rate, which is currently the highest in the world.

“Temporary tax measures never spur economic activity because families and businesses don’t make economic decisions based on short term tax breaks,” Dubay said. “When trying to achieve a specific purpose, it has to be done correctly and the payroll holiday is the wrong way.”

But the Obama Administration has said a payroll tax cut is the right way to help the people who have been hit hardest by the recession — low and middle income Americans. The Democratic Senatorial Campaign Committee issued a release in August attacking Republicans for not supporting the extension.

“The payroll tax cut provides relief to middle class families that need it right now, not special interests that get all the tax breaks,” DSCC spokesman Matt Canter said in the release.

If it were up to presidential candidate Rick Perry, the federal payroll tax would probably disappear altogether. The Texas governor and GOP presidential front-runner has said Social Security and Medicare, the two programs paid for by payroll taxes, should be run by the state, not the federal government.

“I think the states are the ones who should be making the decision on whether or not they want to be spending their dollars on those types of programs—not having it made in Washington, D.C, ” Perry told the Daily Beast last November.

In his book Fed Up! Perry calls Social Security a “Ponzi scheme,” a “failure,” “something we have been forced to accept for more than 70 years now,” and one of many New Deal programs that have “never died, and like a bad disease, they have spread.”

Most Texas public employees do not pay into the federal Social Security system and instead are enrolled in state retirement programs. For example, most public school teachers get their retirement through the Teacher Retirement System of Texas and pay a flat 6.4 percent tax, a higher rate than the Social Security payroll tax even before the 2010 tax break.

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