Deficit and Tax Policy

September 23, 2011 By David Morris

Payroll Tax Cut Will Not Lead to Increased Payrolls

It’s been more than a week since President Obama made his big plea speech to Congress on how he wants the government to help create jobs. As one would expect, the announcement of the President’s “American Jobs Act” has been met with a mix of opinions.

While there are many proposed policies in the jobs act, the $240 billion payroll tax cut is the biggest component and deserves a deeper look. 

The tax break is designed so that the employer’s payroll tax will be cut in half to 3.1%, and the employee would see the 2011 payroll tax cut extended through 2012. Employers will also not have to pay the payroll taxes for hiring new people or giving raises. By leaving more money in people’s hands, the government hopes they will spend more on goods and labor.

Both of these goals sound great on paper, but the important question is how do they play out on the field? Through all the political rhetoric and partisan pageantry, an overarching opinion seems to be taking shape.  While parts of the plan should help the economy in the short term, a lot is left to be desired in terms of spurring lasting job creation and improving the country’s bleak long-term outlook.

One concern is that the payroll tax cut expires by 2013. After it expires, what happens?

Usually, when an employee is hired it’s done with the understanding that they will work at that company for at least a few years. What happens in 2013 to someone hired using a company’s payroll savings?  Would they be fired because the employer can’t afford to keep them on now that they count against the payroll tax? If not, then it is likely the employer was able to afford the employee before the payroll tax cut, really sees the extra money just as a bonus.

The other major concern with the payroll tax cut is, what if both the employer and employees decide to pocket their tax savings? Inherent in this tax cut is the assumption that employees will spend the extra money and help the economy. However, studies of the last payroll tax cut show that people chose to save that money.

That’s great for that rainy day, but if workers are pocketing their savings, then demand in the marketplace remains the same.  Without strong demand, businesses receive more benefit from saving their tax cut than using it to hire, because lack of demand is currently the biggest impediment to job creation.

So, if workers aren’t spending,and employers aren’t hiring, then the payroll tax cut fails to achieve any of its goals.

One of the most overlooked consequences of a payroll tax cut is that it doesn’t put money in the pockets of the right people. Everyone who is affected by a payroll tax cut already has a job whereas people who are unemployed won’t see a dime more. It is truly unfortunate, obviously,because the unemployed need the money more and, on top of that, are more likely to spend it.

Don’t get me wrong, the payroll tax cut is not the worst idea in the world considering that both Republicans and Democrats have supported it in the past and it is usually popular among Americans. However, looking at a poll by Pew Research and the Washington Post, it’s clear that the public isn’t as excited as one might think.  The majority of respondents thought that tax cuts would help improve the job situation “a little” or “not at all”.  

Unfortunately, the people have the right mindset. While there is a possibility that the payroll tax cuts create more jobs and increase demand, any gains created will be short lived.

The U.S. needs a long-term solution to its economic woes and temporary tax cuts are not the answer. America needs a jobs plan that helps create jobs now and keeps them in the future.

• Taxes

• Spending

• Job Creation

• National

• Social Security

• American Jobs Act

• Jobs

• Payroll Tax

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