Payroll tax cut could expire on Jan. 1

Bob Moon Dec 21, 2011

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.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.