NCPA - National Center for Policy Analysis

Doubling Down on the Payroll Tax Holiday Won't Create Jobs

September 19, 2011

The August jobs report showing exactly zero net job creation and an unemployment rate hovering above 9 percent have reinforced the imperative among Washington policymakers to focus on job creation policies in the waning months of 2011.  The focus is certainly right, but most of the policies under consideration would produce the same results as President Obama's jobs policies to date: no additional employment.  No policies under consideration today offer a greater assurance of failure than the proposal to extend the existing payroll tax holiday -- or to double down by extending that holiday to the so-called employer's share of the tax, says J.D. Foster, the Norman B. Ture Senior Fellow in the Economics of Fiscal Policy at the Heritage Foundation.

Payroll tax relief is intended to stimulate the economy in two ways, neither of which works:

  • First, payroll tax relief reflects the faulty Keynesian stimulus philosophy of putting money in people's pockets via tax breaks.
  • The second way a payroll tax holiday is supposed to stimulate the economy is by making labor less expensive to hire, thus leading to additional hiring, more output and increased incomes.

However, such assertions rely on faulty assumptions -- in this case that the tax is paid by the employer.  Were that the case, then the removal of the tax would likely accomplish exactly what President Obama suggests.  However, the payroll tax is largely borne by the employee, both explicitly in the form of a Social Security tax and implicitly in the form of lower wages.  Because the burden of the tax falls largely on workers, the expected financial return on work increases with the holiday.  This will cause an increase in the supply of labor as more workers enter the workforce to take advantage of higher wages; but when there is high unemployment, increasing the supply of workers does nothing to increase the demand for workers, so it just means more unemployed workers.

Through these faults, the tax holiday would in fact have a net negative impact on employment, both by crowding out private sector investment and by attracting more jobless people into the workforce.

Source: J.D. Foster, "Doubling Down on the Payroll Tax Holiday Still Won't Create Jobs," Heritage Foundation, September 8, 2011.

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