Economists Split on Job-Creating Power of Payroll-Tax Cut

There's a real-time countdown clock on the White House website. The messages: "If Congress doesn't act, middle-class taxes will increase," and "put Americans back to work."  But some critics, including a few Democrats, voted against a related measure last week because they believed that extending the payroll-tax cut will do little to combat unemployment.

Two Democratic senators - Joe Manchin of West Virginia and Jon Tester of Montana - voted against the provisions in the Senate Friday, breaking with President Obama and Republican leadership.

Tester supports parts of the president's American Jobs Act but is still decisively against extending the payroll-tax holiday.

"Although I support making sure millionaires and corporations pay their fair share in taxes, I do not believe this particular proposal will create jobs or give our economy the boost it needs right now," Tester said before voting against the bills last week.

Yet the top Republicans in the House and Senate agree with the president when they say that extending the popular soon-to-expire tax cut will help spur economic growth.

"I don't think there's any question that the payroll tax relief, in fact, helps the economy," House Speaker John Boehner, R-Ohio, said. "You're allowing more Americans, frankly every working American, to keep more of their money in their pocket. Frankly, yeah, that's a good thing," even after Politico reported Boehner using colorful language to describe the Democratic offer behind closed doors.  Twenty-six Republican senators voted against the payroll tax holiday plan put together by Republican Minority Leader Mitch McConnell of Kentucky.

Most economists say that extending the payroll tax will spur consumer spending but critics suspect that the people receiving the tax break are saving their pay check out of anticipation of hard times ahead.  Other economists believe that there is not enough data available to make a clear assessment.

"I think that the economy is so fragile and the recovery is so weak that if the payroll tax is allowed to expire, you'd end up reducing money in consumer's pockets and that would end up reducing demand," said David Kautter, who is managing director of the Kogod Tax Center at American University in Washington, D.C.

But some of the recent economic numbers, though limited in scope, appear to suggest otherwise.

The average American savings rate increased in September by 0.2 percent or $23 billion, according to the Bureau of Economic Analysis.  Americans also owed less money as U.S. household debt fell by 0.6 percent in the third quarter of this year, or $60 billion, according to the New York Federal Reserve Bank.

"People don't generally respond well to temporary tax cuts so it's unlikely you're going to see a strong economic response," said Andrew Biggs, who is a resident scholar at the conservative-leaning American Enterprise Institute.  "This really isn't a left-right issue, it's just a question of how big an effect you think it'll have and weather the stimulative effect is worth the cost. My guess is that it isn't."

Obama said Monday that credible experts have warned him that Congress must pass the extension to both the payroll tax holiday and unemployment insurance to prevent economic harm.

"Independent economists, some of who have in the past worked for Republicans, agree that if we don't extend the payroll tax cut - we don't extend unemployment insurance - it will hurt our economy," Obama said in the press briefing room.

But not all economists share this point of view.

Kautter of the Kogod Tax Center, who favors extending the payroll tax holiday, admits that the economic community is deeply divided.

"Of the economists I've talked to and from what I've read," he said, "there is a clear division in the economic community among economists as to the impact of the payroll tax reduction for this year."