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Do payroll tax cuts help the economy?

Heidi Moore Dec 2, 2011

Mitchell Hartman: The Senate yesterday failed to agree on a deal that would extend payroll tax cuts, a key part of President Obama’s stimulus. Right now, those tax cuts are boosting the average American’s take-home pay by more than $1,000. But that extra pocket money will vanish if Democrats and Republicans can’t agree on how to pay for an extension. What economists can’t agree on: whether the tax cuts help the economy.

Marketplace’s Heidi Moore explains.

Heidi Moore: When you have a struggling economy like ours, the answer may seem simple: put more money in people’s pockets.

Howard Gleckman: What you want to do with any kind of a tax cut now is increase demand. You want to put money in people’s pockets so they spend it, they buy stuff; the people who sell the stuff hire more workers.

That’s Howard Gleckman with the Tax Policy Center. He’s skeptical of this tax cut.

Gleckman: The bang for the buck for a tax cut like this is I think going to be relatively small.

People are more likely to save than spend now. And this tax cut wouldn’t be enough for employers to start hiring.

Even so, MIT professor Michael Greenstone points out this tax cut has been in place for years.

Michael Greenstone: If the payroll tax is not extended, households making under $100,000 will get a 2 percent tax increase.

Both experts say that while extending the payroll tax is a long shot, it’s better than doing nothing at all.

In New York, I’m Heidi Moore for Marketplace.

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