Guest Post: How Effective Would a Payroll Tax Holiday Be In Spurring Employment and Stimulating the Economy?

Washington’s Blog

Obama’s tax deal with Republicans extends the Bush tax cuts for the wealthy for another 2 years.

As Bloomberg notes, Obama said that “he still believes the nation can’t afford to permanently extend the top tax rates”.

But as Mish points out:

Of course the last extension was “temporary” and the next extension will be “temporary” as well.

Obama’s plan would also extend aid for the long-term unemployed for another 13 months.

And the payroll tax (which funds Social Security and Medicare) would be cut by 2 percentage points during 2011 in an effort to help spur hiring.

Will cutting the payroll tax really help to spur hiring?

The Center on Budget and Policy Priorities argued in January 2009 that it wouldn’t.

Suspending employees’ payroll taxes would immediately translate into higher take-home pay for workers. Suspending employers’ payroll taxes, by contrast, would put cash into companies’ coffers, where it is likely to sit as long as sales are weak and factories are operating below full capacity. Indeed, according to the Congressional Budget Office [here’s the CBO report], suspending employer’s payroll taxes is “not a particularly cost-effective method of stimulating business spending: Increasing the after-tax income of businesses typically does not create an incentive for them to spend more on labor or to produce more, because production depends on the ability to sell output”. In other words, firms will not hire (or retain) more workers than it takes them to produce the goods and services they can sell. Simply giving them a general tax break is unlikely to affect their hiring or investment in most cases, and thus would be largely ineffective as stimulus.

Standard economic analysis suggests that over the long run, a permanent reduction in the employer payroll tax would increase wages, as competition forced employers to pass on the benefits of the tax cut to their workers. But a two-month holiday on the employer share of the payroll tax would not have that effect: according to the Congressional Budget Office, “[s]uspending the employers’ portion of the tax for a short period of time is unlikely to alter wage rates by very much and so would not alter consumers’ resources very much.” Firms generally would not raise wages for two months and then cut them, and the reduction in wage costs would be too brief to make it worthwhile for employers to increase hiring. Instead, businesses would likely retain all or nearly all of the benefits from the tax holiday.

Would infusing cash into businesses in this manner constitute effective stimulus? Probably not. The primary problem that employers face in a recession is a shortage of demand for their products, not a shortage of cash. Therefore, most firms would likely keep much or all of any tax windfall they receive — or pass it on to shareholders and business owners, two groups that tend to have higher incomes and thus quickly spend relatively little of any additional income they receive.


The Urban-Brookings Tax Policy Center estimated that in 2006, 51.2 percent of payroll taxes were paid by the top 20 percent of tax units.

(Obama is proposing a year-long payroll tax holiday, not the 2 months discussed by CBPP. I’m not sure how much difference CBPP would find in an additional 10 months).

But as Annie Lowrie noted in September:

The Congressional Budget Office examined (PDF) the effectiveness of a variety of tax cuts this winter [in an updated report], and found payroll tax cuts to be a good option, compared with, say, extending tax cuts for the wealthiest Americans. Moreover, they have positive impacts on employment — and the sustained high rate of joblessness remains the biggest drag on the American economy and a pressing public-policy issue.

According to the CBO, a payroll tax cut is about 25 to 33 percent more stimulative than providing a refundable tax credit for lower- and middle-income households, for instance.

As I noted in 2008, Mark Zandi – chief economist for Moody’s – calculated which stimulus programs give the most bang for the buck in terms of the economy:

Zandi lists a cut in payroll taxes as being less stimulating to the economy than food stamps, unemployment benefits (which Obama extended), infrastructure, and aid to the states, but more stimulating than tax cuts and tax rebates.

The Washington Post’s Ezra Klein turned to Zandi in July for updated figures on the effects of a payroll tax holiday:

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.

Klein ran a back-of-the-envelope cost-versus-benefit analysis of a partial payroll tax:

As Zandi’s numbers suggest, the stimulative benefit is just slightly greater than the budgetary cost.


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.

And see this.

Print Friendly, PDF & Email
This entry was posted in Guest Post on by .

About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander…


  1. dave

    So huge giveaways for the ultra wealthy (top bracket, investment, and estate extension) and for deadbeats (unemployment benefits), but if you work for a living and you might get to keep a measly 2% more of your income then its some kind of tragedy. God forbid in a pissing contest between the parasites at the top and parasites at the bottom the people in the middle might get thrown a piece of meat.

    The payroll tax holiday is the only Keynesian proposal I can stomach looking at. If you want the support of the 90% of people with jobs that aren’t in the top 1% then you’ll get behind it too. If politicians really took their Keynesian theories seriously and not just as an intellectual shield for increasing government spending in order to steer the economy in their preferred direction they’d be talking about a two year holiday from the entire tax, not just 2%.

    1. F. Beard

      Parasites at the bottom? Would you prefer they starve? If the shrinking economy destroys YOUR job will you change your mind?

      Unemployment benefits should be indefinite not 99 weeks or even 999 weeks. Until the economy can provide work for the population then the idle rich will just have to tolerate the idle poor. It’s the price they should pay for their thieving government backed fractional reserve counterfeiting cartel.

      1. Michelle

        Why not just let the entire population go on unemployment. The government can give us all money to do nothing and the economy can receive $1.60 per $1 they hand out. That sounds great to me. I wish to to god all the working Americans who pay for these programs could just quit. Then, after all the lazy parasites on the system have starved to death because no one is supporting them anymore, we could get on with a healthy, debt free economy.

    2. John L


      Guess you didn’t read the article very closely. Giving employers a tax break on SS and unemployment taxes doesn’t translate into more money for the employees, the employers just put that money into the bank for themselves or their business.

      As for the “deadbeats” comment, I can only say you must not know any “hardworking” people who suddenly found themselves without a job and no comparable employment opportunity in sight. I interviewed 12 people for a job this summer; several of them I spoke with said they’d been unemployed for 10+ months. These weren’t “deadbeats”, these people were college educated, experienced in their career and desperate for a job, any job.

      1. Charles Kiting

        Can’t wait for 2017 when this 2% payroll cut will “suddenly” cause some sort of Medicare/SSA meltdown.

        The spinelessness of the American politician rivals that of WWII-era France.

  2. apinak

    The real danger of a payroll tax holiday is that it undermines funding for Social Security. From Bruce Bartlett-

    “But a payroll tax holiday is Pandora’s Box and best left unopened. Republicans would prefer to destroy Social Security’s finances or permanently fund it with general revenues than allow a once-suspended payroll tax to be reimposed. Arch Social Security hater Peter Ferrara once told me that funding it with general revenues was part of his plan to destroy it by converting Social Security into a welfare program, rather than an earned benefit. He was right.”

    1. attempter

      The assault on SS has nothing whatsoever to do with rational concerns about its funding. Nor does the attempt to villify it as “welfare” rather than an entitlement have any effect.

      The people overwhelmingly support SS and want to see it strengthened.

      The elites universally want to destroy it, because they want to steal the money for themselves, because destroying it would further weaken the people, and because they simply hate the idea of having to trickle back down any of what they’ve stolen.

      The fact that SS is perfectly solvent and has no funding problems whatsoever is meaningless in a system run by criminals, where their lies prevail.

      1. Jim Haygood

        According to the Financial Report of the United States, Social Security has a negative net worth of $7.677 trillion.

        Counterfactually claiming it’s ‘solvent’ doesn’t make it so.

        1. ScottS

          Social Security has over $2 trillion set aside for it.

          The “shortfall” comes from the fact that the Social Security Trust Funds lent that money to the US government (t-bills). As people withdraw their money from the trust fund, there is a vacuum, right?

          Not really. People who withdraw their Social Security savings aren’t going to just burn the money. They’ll spend it things. Mostly healthcare, retirement homes, and vacations.

          So the government will make up the balance in business and income taxes on new industry created by people who are now spending their earnings.

          And distributing Social Security is good because it will encourage baby boomers out of the workforce and free up jobs for younger people.

          The crucial thing is capturing the money baby boomers spend. If they spend it on retirement homes in Costa Rica, that’s bad for us. If they buy US-made cars and property and vacations in the US, that’s good.

        2. attempter

          Social Security is an account payable by the US government. The only way it can be insolvent is if the government is insolvent. That’s impossible for a government sovereign in its own currency.

          So whenever anyone in the government claims SS is in trouble, he’s simply threatening a voluntary default on the part of the government.

          And whenever anyone outside the government makes a similar claim, he’s simply predicting such a sovereign default.

    2. Billy Bob

      I have trouble seeing cutting payroll taxes as a good thing. Its not especially stimulative, and at a time when Republicans are saying it’s not funded, under-funding it seems like a really bad idea. It’s a slippery slope from here to funding SSI out of general revenue, where it can be cut as a matter of deficit “necessity.” Once again, our President helps irrational people make their case without a fight and calls it a victory. A few more such victories and we are undone.

  3. attempter

    Under conditions of kleptocracy, I guess this isn’t that bad all things considered. Although extending food stamps would be best (Obama’s cutting those), extending unemployment and the payroll tax holiday can help a little bit to lessen the suffering these criminals have inflicted.

    The tax cut issue is a meaningless joke, and misdirection for “progressives”. There was little chance they’d expire any tax cuts for the rich. And even if those cuts did expire, the revenue would simply be stolen right back through corporatism.

    That’s true of all government revenue. That’s why we must oppose all new taxes or tax increases for the non-rich. Under kleptocracy, every cent taken in will be stolen directly or used to build up the militaristic police state.

    So the payroll tax holiday, meager as it is, is a good. As I just said in my comment above, this has zero effect on Social Security’s funding or solvency, and zero effect on its political prospects.

    1. Skippy

      Sorry to hang my words to yours but, it does seem more like draining the last few drops of blood before the body turns cold.

  4. apinak

    The fact that the SS debate is not rational does not mean that undermining the solvency of the system will not hasten its demise. The elite have so far been unable to destroy Social Security because it is so popular with people. But there is a long-term campaign to undermine support for Social Security and destroying the finances certainly advances that campaign.

    1. attempter

      You think as permanent unemployment steadily creeps beyond 20%, more people sink into impoverishment, and more become economically distressed and afraid, and the whole mass steadily slides down that chute, that people will become more attentive to austerian lies about SS because the politicians try to reframe it from an “entitlement” to a “welfare” program?

      I suppose anything’s possible, but that one’s hard to believe. And as I said, this criminal elite is less and less prone to care what the people demand anyway, even where it comes to simple electoral self-preservation. They’d really rather die than be accountable and responsive.

      So I’d be surprised if they still have long-term neoliberal propaganda plans. All the evidence is that the plan is to steal all remaining wealth as quickly as possible, reduce the people to debt slavery, and from there reimpose feudalism. They no longer have the time, inclination, or perhaps the need to be subtle and patient.

      1. Mickey Marzick in Akron, Ohio

        I read this two or three times and was about to let it go by… but then thought a bit of clarification is in order.

        The first paragraph is suggestive of the immiseration thesis proffered by Marx, i.e., inflict enough pain and suffering on the people and they will rebel and overthrow their oppressors. We’re just not there yet. Do you really believe this? Or does anyone for that matter believe this theory applies to the United States?

        Even with 20% unemployment, the oppression of debt, and pain and suffering not seen in most American’s lifetimes, the other 80% still working have hunkered down and show no sign of rebelling en masse soon. Where I work the latest round of RIFs has made the “fear” of which you spoke palpable, with most of us asking ourselves “Who’s next?” Not a conducive environemnt for rebels… If anything, it reinforces the belief that this is the only game in town and better on the inside looking out than on the outside looking in. Call it “chicken shit”, the “safety first” moral economy of the technopeasant, or whatever you will, but do we really need another martyr to remind us?

        With the population atomized in this “war of all against all” the American people are not some monolithic entity but a number of disparate, fragmented groups in which ETHNICITY/RACE may provide better analytical tools with which to examine the current situation than CLASS. While I would be the first to suggest that class formation is occurring or has occurred, without class consciousness to turn it into a potent sociopolitical force it remains more object than agent. Nor am I certain if the workplace is where resistance will manifest itself if it ever does. Unlike large masses of unionized industrial workers, the technopeasantry does not have the leverage – the ability to shut production down – that the former once wielded. Nor do they show any inclination to wield such leverage when and where they do. [Subject of another discussion.]

        Discussion of fiscal policy – taxation – is of little use when UNEMPLOYMENT at 10% or more [U3] reduces the amount of monies collected via OASDI and FICA. Irrespective of what MMT might argue, it’s simple enough for most Americans to understand that reduced tax revenues attribuatble to high unemployment is the source of the budget shortfall for Social Security and/or Medicare over time. If only 80% are contributing to OASDI and FICA and a significant number of those contributing make only the median wage, if not less, the current outlays are not sustainable without significant changes in fiscal policy, one of which is not an increase in taxes on the wealthy as the article makes clear. Nor are those still working likely to favor any increase in their taxes to fund any budget shortfall, real and/or contrived. Higher UNEMPLOYMENT is the very tool with which to starve the beast… to make the emasculation of Social Security and Medicare necessary which brings me to my final point.

        Inasmuch as the second paragraph suggests that the kleptocracy no longer need to respond to the “wishes” of the American people, why would they have to resort to an iron-heeled AUSTERITY if a brass-knuckled one can be achieved via the electoral process – constitutional means – over time? Indeed, wouldn’t this slower bleeding out transitioning to the “new normal” of much reduced living standards tend to prevent the very immiseration implied in your first paragraph? Why club anyone when securing their acquiescence as “willing penitents” will preserve the façade of representative democracy and constitutional government? Even Martin Wolff has suggested that AUSTERITY be phased in so as not to precipitate the very “immiseration” that might make overt repression necessary. That we have moved from trickle-down austerity to a more brass knuckled variant with little OVERT collective opposition would suggest that the kleptocracy has little incentive to hurry as the American people have become “convinced” of the need for austerity, making its more virulent iron-heeled variant unnecessary.

        Even if this brass knuckled austerity results in a further reduction in living standards – immiseration – it will likely be seen as necesssary and therefore, legitimate in the eyes of the American people. And so long as it is LEGITIMATE, the way things should be, subscribers to the immiseration thesis will wait… and wait… until their living hell freezes over.

        1. Billy Bob

          “(T)he American people are not some monolithic entity but a number of disparate, fragmented groups in which ETHNICITY/RACE may provide better analytical tools with which to examine the current situation than CLASS.”

          You mention the absence of unions as being part of this, and I think you are right. But what part does Democratic embrace of identity politics – breaking the electorate down into a coalition of gays, women, African-Americans etc. – play in this inability to build solidarity out of immiseration?

        2. attempter

          Who said they were necessarily going to “rebel en masse”? All I said (which you somehow missed in your reading it two or three times) was they’re not likely to believe that lie, whether they do anything about it not.

      2. Frank

        Our leaders (and their pathetic shills in the corporate media) know that “American democracy” is an illusion, and what they are promoting instead is a brutal, savage state of affairs.

        In today’s article at Truthdig, entitled “Happy as a Hangman”, Chris Hedges writes:

        “The creation of a permanent, insecure and frightened underclass is the most effective weapon to thwart rebellion and resistance as our economy worsens. Huge pools of unemployed and underemployed blunt labor organizing, since any job, no matter how menial, is zealously coveted. As state and federal social welfare programs, especially in education, are gutted, we create a wider and wider gulf between the resources available to the tiny elite and the deprivation and suffering visited on our permanent underclass. Access to education, for example, is now largely defined by class. The middle class, taking on huge debt, desperately flees to private institutions to make sure their children have a chance to enter the managerial ranks of the corporate elite. And this is the idea. Public education, which, when it functions, gives opportunities to all citizens, hinders a system of corporate neofeudalism. Corporations are advancing, with Barack Obama’s assistance, charter schools and educational services that are stripped down and designed to train classes for their appropriate vocations, which, if you’re poor means a future in the service sector. The eradication of teachers’ unions, under way in states such as New Jersey, is a vital component in the dismantling of public education. Corporations know that good systems of public education are a hindrance to a rigid caste system. In corporate America everyone will be kept in his or her place.”

          1. Frank

            excerpted from your article

            “The natural order of a free society — predicated on voluntary private-property transactions — is hierarchical and elitist. Diverse human talents (we are unique, after all) dictate that a few individuals rise to the status of an elite. But elitism always conjures jealousy in the mediocre majority, so the elites and their natural talents are tamped down by the tyranny of egalitarianism.

            Instead of repressing the talents of the elites to assuage perceived slights, we should let them flourish, as we should all flourish, sans the stifflingly political rigmarole of democracy and representative republicanism.”

            But what if the elites are already flourishing? To the point where today it’s become impossible to find any difference (in terms of ethical standards) between an investment banker at Goldman Sachs and the fictional Patrick Bateman of Bret Easton Ellis’s “American Psycho”.

            Bateman, you’ll recall, was a successful Wall Street investment banker by day and a serial killer in his spare time. When he wasn’t stabbing the homeless to death with his switch-blade, he enjoyed taunting them by holding out a dollar bill, then pulling it back when they tried to reach for it.

            Bateman, of course, was a parody of the self-obsessed yuppie, but his complete lack of ethics could have been modeled after any number of real life Wall Street bankers.

            Is the fictional Bateman really that different from today’s investment banksters at Goldman Sachs, JP Morgan and others who profit from the war machine and the murder of innocent civilians in Iraq and Afghanistan, to say nothing of the human suffering caused by diverting all that bailout money to the banksters and away from homeless shelters, the mentally ill, job creation, etc.

          2. attempter

            I’m glad Frank excerpted that vile garbage so I wasn’t tempted to click on it.

            The funniest thing about it is how patently false it is. No thesis in all of history has been more completely disproven than that if you economically empower alleged elites, you get good performance. On the contrary, we know nothing is more characteristic of any calcified power elite (and by definition they all calcify) than absolute incompetence at anything other than crime.

            It’s actually pretty insulting and degrading to people who have real talents and abilities, the way these Randians chuck their own filth all over them, claiming the only thing which can actuate people is the most vicious gutter inducements of power and money. The “libertarians” merely reveal the cesspool in which their own soullessness wallows.

            Any human being would certainly rather be part of a healthy, productive cooperative community dedicated to maximizing the real rewards of life – love, friendship, happiness, creative expression, productive self-determination. Where people have the full opportunity to seek all of those things to their hearts’ content, as well as all they could need materially, why would they care about hoarding money and power and wielding them as weapons? Only subhuman trash would want such a thing.

          3. F. Beard

            I have no problem with a natural elite but that is not who is running the country. How could they? To get ahead in the US one must either be a fractional reserve banker or borrow from them. But fractional reserve banking is inherently dishonest so it corrupts everyone who deals with it.

            So, the folks who have the most money and most power are most likely to be corrupt in our society.

            The true natural elites abhor falsehood yet our society rewards it.

            I suggest the folks at get behind a Jubilee or a bailout of the population from our unnatural, un-elite rulers.

          4. ScottS


            Somehow, all of Ayn Rand’s followers convince themselves that they are all unique and individual snowflakes. And yet they tend towards conformity, given the chance:

            “In 1958 Nathaniel Branden established Nathaniel Branden Lectures, later incorporated as the Nathaniel Branden Institute (NBI), to promote Rand’s philosophy. Collective members gave lectures for NBI and wrote articles for Objectivist periodicals that she edited. Rand later published some of these articles in book form. Critics, including some former NBI students and Branden himself, have described the culture of NBI as one of intellectual conformity and excessive reverence for Rand, with some describing NBI or the entire Objectivist movement as a cult or religion.[69] Rand expressed opinions on a wide range of topics, including literature, music, sexuality, even facial hair, and some of her followers mimicked all her preferences, wearing clothes to match characters from her novels and buying furniture like hers.[70] Rand was unimpressed with many of the NBI students[71] and held them to strict standards, often reacting coldly or angrily to those who disagreed with her.[72] However, some former NBI students believe the extent of these behaviors has been exaggerated, with the problem being concentrated among Rand’s closest followers in New York.[73]”

            So much for individualism. She really does crack me up. Rich people with superiority complexes must jerk off to Atlas Shrugged.

            “…the left-leaning Mother Jones remarked that “Rand’s particular genius has always been her ability to turn upside down traditional hierarchies and recast the wealthy, the talented, and the powerful as the oppressed”,[153]…”

  5. Brian

    Plain and simple this tax deal is utterly irresponsible and reckless, and for one of the few times (as with the bailouts) I find myself in Senator Bernie Sanders’ camp.

  6. /L

    Suspending employers’ payroll taxes will as said put more money in the companies’ coffers, the situation is that American big business already sit on top of piles of cache, relatively they haven’t had so much cash since 1964. Big business borrows just because it’s cheap but don’t invest in new production. It’s cheaper for Microsoft to emit bonds than take home their own money from overseas. If suspending employers’ payroll taxes are extended it can be a risk of companies cutting prices and fuel deflation and poor Bernanke have to pour out trillions of dollars again in to the banks coffers to “fight” deflation.

    There seems to be a some sort of bias against pouring economic stimulants’ on ordinary consumer on main street.

  7. F. Beard

    The payroll tax cut idea is good. As for the Republicans desire to cut SS it should be contrasted against their thieving government backed banking cartel which steals purchasing power from all dollar holders including the poor.

    This is the Achilles Heel of the greedy Republicans, their wealth was earned via government privilege. Never let them forget it or the Military Industrial Complex that is another source of their unjust wealth.

    1. ohioralph

      F. Beard, I always find your comments to be consistent in your recognition of the destruction of capital formation created by fractional reserve banking. Certainly, a debt jubilee would acknowlege this issue as would placing TBTF banks in receivership while the fraud in the chain of title could be prosecuted and the fraudulent mortgages are put back to the originating banks. I would prefer the latter as that would prove that the rule of law is still a principle or the republic but unfortunately such prosecution would require a President who is not bought and paid for by the TBTF banks.

  8. F. Beard

    The ultimate “stimulus” would be a bailout of the entire population.

    Debt forgiveness is commanded every seven years in Deuteronomy 15. However, since fractional reserve banking cheats savers too a bailout would be more just.

    Do it Obama. You claim to be a Christian; let’s see you free the population from the usury class.

    1. Ellen Anderson

      Plenty of middle and lower income people are self employed. A lot of them started their own “businesses” as they were laid off during the past twenty years. The payroll tax is a huge burden on them.

  9. petridish

    Simple logic would suggest that until the American population is relieved of their burden of unpayable debt, any extra money they are given, regardless of where it comes from, will be used to pay down that debt.

    What did everyone think was going to happen when, over the first decade of this century, virtually all of the manufacturing capacity, the potential for innovation and the tens of millions of good-paying, middle-class jobs were given away and replaced with unserviceable debt?

    Won’t someone please RTFQ (read the fuckin’ question) before attempting an answer!!!!

    1. F. Beard

      What did everyone think was going to happen when, over the first decade of this century, virtually all of the manufacturing capacity, the potential for innovation and the tens of millions of good-paying, middle-class jobs were given away and replaced with unserviceable debt? petridish

      Yep. Without the government backed counterfeiting cartel, the corporations would have been forced to issue common stock to finance that move in which case the new stock holders might have voted against it or at least profited from the move.

      Without the counterfeiting cartel, corporations would have been forced to share wealth with the population rather than steal it.

  10. Bernard

    killing Social Security is all that matters. and this will work. With Obama as their “agent”, we shall see this as just the tip of the iceberg.

    Smart people who know what they are doing.

  11. F. Beard

    According to some theorists, it is ultimately taxation that gives the dollar value. So those who fight taxation might be defeating themselves. However, I note that people are generally not opposed to taxation on others.

  12. F. Beard

    “…the left-leaning Mother Jones remarked that “Rand’s particular genius has always been her ability to turn upside down traditional hierarchies and recast the wealthy, the talented, and the powerful as the oppressed”,[153]…” ScottS

    She was a gold-bug too. The interesting thing about gold as money is that it requires government sanction (acceptance as money for taxes) plus (most probably) fractional reserves (theft of purchasing power) to be a successful money form.

    Money is a mind-boggling topic and I don’t blame Ayn Rand for not understanding it but clearly she saw only one side of the story.

  13. firstSTREET

    Payroll tax is such a controversial topic. I just don’t get why we need to tax the people who can’t afford it more than the people who can! Thanks for the numbers and information!

    Become a Facebook fan for discounts on Baby Boomer gadgets and more

Comments are closed.