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Payroll tax cut is just chicken soup for the economy

COMMENTARY Keeping the payroll tax cut is one of the few things that the leading presidential contenders all agree on. In a speech tonight President Obama will blast GOP leaders in Congress who, he says, are set against it.

Meanwhile, Republicans Mitt Romney and Newt Gingrich love the payroll tax cut because nearly 60 percent of Americans are in favor of it. This is because they've been told that having it go away "will reduce economic growth next year and cost hundreds of thousands if not millions of jobs."

There's only one problem: That may not actually be true.

If Congress doesn't act by Dec. 31, the current 4.2 percent payroll tax for employees will climb to 6.2 percent in 2012. We aren't talking about the tax you pay on the full amount of your paycheck. This cut is on the wages withheld for Social Security and Medicare.

The cut was enacted last December. In addition to giving businesses a credit for new hires, the cut has put about $900 back into the paychecks of the average U.S. household over the last year. You may not have noticed your pay raise because that works out to about $17 a week. Although that doesn't sound like a lot individually, multiply it by the more than 114 million U.S. households and you get a very impressive $102 billion total.

So there's no doubt the tax cut has put money back into the economy that wouldn't have otherwise been there and should be continued. But let's not kid ourselves that this is what's going to decide our economic future.

In the year the cut has been in effect the unemployment rate has stayed pretty much even at 9 percent (except for last month, which was a statistical hiccup, not real growth). The best economic news is that the rate of layoffs has stabilized. GDP is now growing at an anemic 2 percent for the year, up from the prior "not-technically-a-depression" rate of 1.3 percent.

All this is good stuff because it's better than what happened the year before the tax cuts took place. What the tax cuts may do at best -- if the economy doesn't tank because of issues in Europe and China -- is maintain the status quo.

There's a serious problem with the paycheck side of the tax cut, which hampers its effectiveness. As Howard Gleckman of the Tax Policy Center says:

Because it is so badly targeted, many relatively high-income workers -- who are more likely to save rather than spend some of this windfall -- would benefit. And if the idea is to boost the economy by increasing demand for goods and services, giving the money to savers isn't helpful.

Further, the other part of the bill, which gives businesses a tax credit for new hires, is window dressing and nothing else. It has been tried before and all it does is give companies money for new jobs they would have created anyway. It encourages nothing while making the deficit worse.

The payroll tax cut should be extended because it does do some good. But the underlying problems of the economy are so severe, it's a cure that's more chicken soup than penicillin.