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Extending Payroll Tax Cut Would Keep 1.1 Million People Out of Poverty

The goal of a payroll tax holiday is to temporarily shore up consumer spending for working households; no one would mistake it for targeted antipoverty policy.  Yet, it does have the added benefit of reducing poverty.

Using Census Bureau data for 2010, I estimate that the current payroll tax holiday, which expires at the end of the month, would keep roughly 1.1 million low-income workers and their family members above the poverty line next year if Congress extends it.  (A bill by Senator Casey to extend and expand the tax holiday, which the Senate rejected yesterday, would have kept 1.7 million people out of poverty.)

Those figures reflect only the tax cut’s direct impact on workers; they don’t include any effect of the tax cut on preserving jobs in the broader economy by boosting consumer spending— which, after all, is the main point of the tax holiday.

To make this estimate, we can’t use the official poverty measure because that only counts pre-tax, cash income.  Instead, we use a broader measure recommended by the National Academy of Sciences and preferred by many experts; it counts income after taxes and non-cash benefits, subtracts certain medical and work expenses, and uses a slightly modernized poverty line.

The fact that the tax holiday reduces poverty somewhat doesn’t mean that it mostly benefits struggling families — it targets virtually all workers, and only about 7 percent of the money goes to families with cash income below $30,000.  Compare that, for instance, with another credit that targeted virtually all workers:  the President’s Making Work Pay Tax Credit, which expired last year, provided 18 percent of its money to that group.

Still, by extending the payroll tax cut — as well as expanded federal unemployment insurance, which kept more than 3 million people out of poverty last year but expires at the end of the month — Congress can provide critical help to a still-weak economy while fighting poverty at the same time.