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To Help the Economy, First Don’t Hurt It

American workers are getting a $120 billion boost in their take-home pay this year from the payroll tax cut that President Obama and Congress enacted last December.  Extending that tax cut for another year is a first, essential step to help the struggling economy, as our new report explains.

The tax cut — a reduction in the employee share of the Social Security payroll tax — will benefit 121 million families in 2011, increasing their paychecks by an average of around 1.7 percent, according to the Tax Policy Center.  That works out to $934 for the average worker.

If Congress fails to extend the tax cut by year-end, the paychecks of nearly all working Americans will shrink starting on January 1, costing them hundreds of dollars or more over the course of the year.  (See the table for a few examples.)  That could slow the economy significantly, according to economists at Goldman Sachs as well as Mark Zandi, chief economist of Moody’s Analytics.

Since the payroll tax cut is already in effect, extending it would provide no new boost to the struggling economy.  So Congress needs to do much more.  It should extend the federal emergency unemployment insurance program (likewise set to expire at the end of December); provide more funds to build and repair roads, bridges, and schools; and enact other well-designed stimulative measures.  It could also expand the payroll tax cut, such as by applying it to the employer share of the payroll tax in the case of new hires.

Chuck Marr
Vice President for Federal Tax Policy