NCPA - National Center for Policy Analysis

Payroll Tax Holiday Won't Stimulate, Economists Say

November 30, 2001

The idea of granting Americans a one-month holiday from paying payroll taxes has achieved some measure of popularity among politicians. But most economists say it will fail to achieve the objective of stimulating the economy -- just as the tax rebate passed earlier this year failed to do.

The plan would suspend the 12.4 percent Social Security payroll tax split between employers and employees. A person earning $50,000 would get a one-month's savings of $250. Those earning $80,400 a year or more would be excluded.

Here's what economists are saying:

  • Bruce Bartlett, at the National Center for Policy Analysis, calls it a "terrible idea" and warns that the economic slowdown "is not caused by a falloff of consumer spending, but almost entirely by a falloff in investment" -- and a payroll tax holiday won't change that.
  • Sen. Phil Gramm (R-Texas), a former economics professor, sees the one-month suspension as doing no harm -- but adds that it probably won't do any good either.
  • Kevin Hassett, at the American Enterprise Institute, would prefer to see "something that raises the long-run growth rate of the economy."
  • The Concord Coalition's Robert Bixby sees any effect as "modest" and notes "that questions have been raised by payroll managers about whether or not you can do this swiftly enough to have an effect."

With the number of shopping days before Christmas swiftly dwindling, there is widespread doubt that Congress, the President and payroll managers would be able to act swiftly enough to encourage greater retail spending by consumers.

Source: Sean Higgins, "Payroll Tax Holiday Popular, But Will It Stimulate Growth?" Investor's Business Daily, November 30, 2001.


Browse more articles on Tax and Spending Issues