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