Tags: Tax | payroll | Cuts | Economy

Tax Foundation: Payroll Tax Cuts Do Little For Economy

Thursday, 09 February 2012 08:28 AM

Payroll tax cuts won't stimulate the economy but corporate income tax cuts will, a Tax Foundation study finds.

Congress is mulling extending payroll tax cuts, but their efforts should focus elsewhere.

"Recent research on similar countries shows that cutting the corporate income tax provides the most bang for the buck when it comes to economic growth," Tax Foundation economist Will McBride says in a statement.

"Given that the U.S. will soon have the highest corporate rate in the developed world, we have plenty of room to make reductions that will both make U.S. companies more competitive and stimulate domestic growth."

Estimates from the Organization for Economic Cooperation and Development (OECD) show that cutting the corporate rate by 10 percentage points is associated with an increase in cumulative real GDP growth of 11.1 percentage points, the Tax Foundation says.

Personal income taxes on high incomes also have a negative effect on growth, such that cutting the rate by 10 percentage points is associated with an increase in cumulative real GDP growth of 7.5 percentage points, the organization adds.

"The fastest growing economies in the OECD all have below average tax rates on both corporate and high income earners," says McBride.

"The only one of the three major taxes where the U.S. boasts a lower rate is payroll – the one that matters the least for long term growth."

The payroll tax cut expires at the end of February, and Moody's Analytics chief economist Mark Zandi has told lawmakers that the U.S. economic recovery "could easily be derailed" if the tax break expires.

Both parties agree on the need to extend the tax cut, although financing the extension has sparked discord.

"We are right back to where we were last December," when negotiations broke down during a previous payroll tax battle, says Senate Majority Leader Harry Reid, according to Reuters.

Failure to renew the extension would hike the 4.2 percent payroll tax back up to 6.2 percent.

While lawmakers have until Feb. 29 (Leap Year) to renew the extension, Congress begins a 9-day recess midway through the month.

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Thursday, 09 February 2012 08:28 AM
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