Payroll tax cut could expire on Jan. 1

No deal in Congress would mean that the payroll tax would rise by 2 percent, and unemployment benefits would be drastically cut.

Adriene Hill: Here at home, politicians are also struggling with government spending and unemployment. The House has voted down an extension of the payroll tax cut. If a new agreement isn't reached by the new year, it'll mean less money for those with jobs, and a cutoff of benefits for many who are out of work.

Here's our senior business correspondent Bob Moon.

Bob Moon: There's some debate over how fiscally stimulating the payroll tax cut has been. University of Michigan economics professor Joel Slemrod conducted a recent survey.

Joel Slemrod: We found that a pretty small fraction of people said that the tax cut led them to mostly increase spending, only around 15 percent, with the rest saying it induced them to save more or to pay down debt.

IHS Global economist Gregory Daco points out, though, that things might have been even worse without the tax cut.

Gregory Daco: It was partly offset by higher gasoline prices that we had in the early part of 2011.

Daco figures Congress's decision could end up carving more than half a percentage point off growth in the new year. And he worries it could be even worse if oil spikes again.

Daco: A double whammy from higher gasoline prices, and not extending the payroll tax cut and emergency unemployment benefits, would bring growth down below 1 percent -- close to recession territory.

Add lingering worries over Europe's debt crisis, and yanking any stimulus now, Daco says flatly, is risky business.

I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.
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Please don't muddy the waters on the Social Security contribution reduction by linking it to a "if oil spikes again" threat. We should all worry if oil spikes again, regardless of whether or not Congress votes to extend this one-time reduction. Calling this a "payroll tax reduction" is a euphemism for what it really is - employees paying less into the Social Security system, which millions of Americans rely on for Old Age, Survivors, and Disability Insurance programs.

Try this parallel - ask employees to contribute 5% of their pay to a retirement plan, then tell them that their contribution is being reduced to 3%. Doesn't the employee understand that they will have less in that plan when they retire? This is what we are doing to Social Security.

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