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Research Desk responds: What would the stimulative impact of a payroll tax holiday be?

By Dylan Matthews

FormerSwingVoter asks:

Any idea what the economic impact of an employee-only payroll tax holiday would be? Since it’s a Republican idea, it might actually stand a chance of passing, assuming they didn't actually call it “stimulus".

As always, Moody's Mark Zandi has the economic impact estimates (PDF) you're looking for. Read here for a full look at Zandi's evaluation of stimulus proposals, and here for a look at the methodology he uses to calculate how effective each proposal is.

Zandi's most recent number estimate of the per-dollar economic impact of a payroll tax holiday is $1.24. This is a relatively high figure, but there are a number of better options, including expanding food stamps, work share programs, direct aid to states and a jobs tax credit. FormerSwingVoter proposes a payroll tax holiday just on the employee side; this makes up half of revenue from Social Security taxes, with employer contributions making up the rest. OMB figures (PDF) place Social Security tax revenue in Fiscal 2011 at $674 billion, so a full payroll tax holiday for employees would cost $337 billion. Multiplying this by the $1.24 bang-for-buck estimate should give a rough idea of the economic impact of the proposal; I included partial tax holidays as well, as a full holiday would probably be too expensive to pass:


As Zandi's numbers suggest, the stimulative benefit is just slightly greater than the budgetary cost. As an editorial aside, I would dispute FormerSwingVoter's belief that this would appeal more to Republican legislators. Given that most resistance to additional stimulus is driven by, or at least coached in, anti-deficit rhetoric, and those focused on the deficit tend to also be very focused on entitlement solvency, anything that increases the Social Security deficit and damages the trust fund is likely to face opposition.

In fact, the Heritage Foundation released a paper opposing the HIRE Act, which is a very modest payroll tax holiday for newly hired workers, on just these grounds, which could be influential among Republican members of Congress. Maybe Ben Nelson and Olympia Snowe would come around to an expanded holiday, but I doubt this would be any more popular than any other jobs proposal Senate Democrats could propose. With better options, such as work sharing or food stamps expansion, available, it's not clear to me that the focus should be on payroll tax relief.

By Ezra Klein  |  July 27, 2010; 5:15 PM ET
Categories:  Stimulus  
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Next: Reconciliation


In theory you could have the government deposit money in the Social Security Trust Fund equal to its lost revenue. This would be a basically symbolic gesture, since the government would just be lending money to itself, but it might be the sort of symbolism which persuades people.

Although the broader point is probably true: Republicans in Congress are opposed to stimulus in general. Just because it's a Republican idea doesn't mean they'll support it in practice. Lots of things are "Republican ideas." It might be able to pick off just enough Republicans to break a filibuster, though.

Posted by: usergoogol | July 27, 2010 6:08 PM | Report abuse

This is a more cynical take, but if Obama proposes it, Republicans opposes it.

Furthermore, Republicans will be against cutting the payroll tax because it is primarily paid by the middle class, even if it was originally their idea, and even if "tax cuts don't need to be paid for".

Posted by: mcfiddish | July 27, 2010 7:10 PM | Report abuse

First, there is no reason at all to limit such a proposal to only the Social Security part of FICA, nor to the employee contribution only. Gross FICA receipts for 2010 are estimated at around $848 billion in the NIPA.

Second, while there are possible stimulus measures with better multipliers there are not many that would have a price tag anywhere near this large. That's a plus. The deficit pseudo-hawks will scream anyway, no matter what is proposed, so why not make them scream at something that will have a very large and obvious effect on ordinary people's pocket books?

The sheer size you can get from such a holiday is important. Food stamp increases and such won't get you close to this number. Even per capita block grants to states to close their yawning budget gaps--also something very worth doing--don't come close.

Finally, whether or not any Republican members of Congress would support such a tax holiday is a poor measure of its political utility. It would put the Democrats on record, before the election, as favoring immediate and sizable assistance to struggling workers and small businesses.

And married with the proposed expiration of the Bush tax cuts for upper income earners, it would expose Republicans as more interested in preserving tax cuts for the wealthy than cutting taxes for the middle class and the businesses that employ them. They might well hold the line in Congress, but it would be painful for them.

Posted by: amileoj | July 27, 2010 7:14 PM | Report abuse

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