January 10, 2011
A front page Washington Post article assessed the amount of stimulus that would likely be coming from the 2 percentage point cut in the payroll tax. While the article did note that many low-income workers will actually be paying more in tax in 2011 than 2010, because of the expiration of the $400 Making Work Pay tax credit, it failed to note the more important point for this discussion, that most workers will see little change in their tax liability.
For example, a worker with the median annual earnings (@ $31,000) would receive a tax cut of $620 as a result of the reduction in the payroll tax. Since they are losing the $400 Making Work Pay tax credit, their net tax cut would be $220 over the course of the year. This is the amount of additional income that could provide a potential stimulus to the economy, not the full $620.
The article failed to make this correction, for example reporting projections of the tax cut’s impact from Mark Zandi at Moody’s Analytics that did not incorporate the impact of the ending of the Making Work Pay tax credit. The Zandi projections show the boost to the economy compared to a situation in which there was no tax cut at all, not the incremental boost associated with the difference between the payroll tax cut and the Making Work Pay tax credit.
The piece also inaccurately depicted the current 5.3 percent savings rate. It noted that this savings rate is well above the near zero rate that existed at the peak of the housing bubble, however it did not mention that the current saving rate is still well below the post-war average of 8 percent. Given that the current rate is still lower than normal, and that many near retirees have just seen much of their wealth disappear with the collapse of the housing bubble, it is more reasonable to expect that the saving rate will go up than down.
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