Would a Payroll Tax Holiday Create Jobs?

This morning, I wrote that of all these job-creating strategies for the Obama administration, the one least likely to see the artificial light of a floor debate on Capitol Hill was a payroll tax holiday. Commenter John Thacker lightly rapped my knuckles by pointing out that the holiday enjoys bipartisan support in the academic community and the political community. Reaching back to the first stimulus debate in late 2008, I see new Atlantic compadre Michael Kinsley wrote favorably of the payroll tax holiday.


FICA is, in effect, a tax on job creation. It applies to the very first dollar earned by a minimum-wage worker, but most of it tops out at an annual income of about $100,000 and doesn't apply at all to income from investments. For most Americans holding jobs, FICA now takes a bigger chunk of their income than the income tax itself. And yet it rarely enjoys the tender concern of tax-cutting Republicans, who prefer to concentrate on tax breaks for capital gains. Cutting the FICA tax in half, for workers and for employers, would make it more affordable for employers to hire -- or avoid layoffs -- while giving everyone who makes less than $100,000 a 7.5% raise to spend and stimulate the economy even further. People making more than $100,000 would get a tax cut too -- as big as anyone else's, though a smaller percentage of their incomes.

One argument against all this is that FICA finances Social Security payments, and the connection between money in and money out helps keep Social Security secure. There's a simple answer: among the many problems we now face, the danger that a majority in Congress will gang up against Social Security benefits must surely rank low.

Well I'm quite nearly convinced! Robert Reich proposes that we cap the tax holiday on the first $20,000 of income. Surely if Reich, Ezra Klein and Michael Kinsley can hold hands with John McCain on a policy, it deserves some serious consideration.

But in the interests of balance, let's consider the opposition. The Center on Budget and Policy Priorities, which I like quite a bit, says the payroll tax holiday would lose the government an enormous amount of money (in the hundreds of billions of dollars) without any guarantee that the foregone profit would stoke job growth. It's a familiar critique of any tax break, which is that the vast majority of benefits go to richer folks who are statistically less likely to spend the money and that firms might simply retain the benefits rather than hire new workers.

That might be true, but it's worth noting that 1) Reich's $20K cap would make the tax holiday more progressive, and 2) The CBPP report from January was focusing on getting money in the pockets of lower-income workers when the economy was six months from recovering, not on stoking job growth after the economy had technically recovered. Making Work Pay might have been the best tax break for its time, but we're out of the nadir and in the slog now.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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