Examining the Payroll Tax Cut

Let our journalists help you make sense of the noise: Subscribe to the Mother Jones Daily newsletter and get a recap of news that matters.


Part of Obama’s tax deal is a cut of two percentage points in the employee share of Social Security taxes. Employers will continue to pay 6.2% of wages, but starting January 1 employees will pay only 4.2%. Greg Mankiw argues that this is backward:

An alternative would have been to reduce the employer’s share of the payroll tax, at least to some degree. Given a sticky wage, this policy would have reduced the cost of hiring and, to the extent labor demand curves slope downward, increased employment. It would also have increased business cash-flow and, to the extent that firms are cash-constrained, increased business investment.

I have a hard time seeing this. If the tax cut were permanent, it might have the effect he describes. But a temporary 12-month reduction would, I think, have virtually no effect on hiring decisions as long as consumer demand stays weak. Conversely, the employee-side tax cut will probably have some genuine stimulative effect. It won’t be huge since much of the money will be saved, but it will be something.

None of this is to suggest that this is why the cut was structured the way it was. I have no doubt that it was mostly done this way so that lots of registered voters would notice an increase in their take-home pay. Still, given the small and temporary nature of the cut, it really does seem as though it’s probably more effective on the employee side than the employer side.

POSTSCRIPT: And just a note, since I think a few people are still unaware of this: the payroll tax cut is being paid for out of the general fund, so it has no effect on the future solvency of Social Security’s trust fund.

SIX TRUTHS

Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

Truth #2: Team Reality is bigger than it seems.

Truth #3: Facebook owns this.

Truth #4: When we go to work, we're in the fight.

Truth #5: It's about minority rule.

Truth #6: The only thing that can save us is…us.

Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

And if you think journalism like Mother Jones'—that calls it like it is, that will never acquiesce to power, that looks where others don't—can help guide us through this historic, high-stakes moment, and you're able to right now, please help us reach our $350,000 goal by October 31 with a donation today. It's all hands on deck for democracy.

payment methods

SIX TRUTHS

Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

Truth #2: Team Reality is bigger than it seems.

Truth #3: Facebook owns this.

Truth #4: When we go to work, we're in the fight.

Truth #5: It's about minority rule.

Truth #6: The only thing that can save us is…us.

Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

And if you think journalism like Mother Jones'—that calls it like it is, that will never acquiesce to power, that looks where others don't—can help guide us through this historic, high-stakes moment, and you're able to right now, please help us reach our $350,000 goal by October 31 with a donation today. It's all hands on deck for democracy.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate