Arguing Over A Tax Cut Few People Notice

Dec 11, 2011
Originally published on December 11, 2011 7:10 pm

Congress and the White House continue to debate the future of a 2-percent payroll tax cut that expires at the end of the year. While both Republicans and Democrats appear interested in extending the break, party leaders have been squabbling over details.

Democrats blocked a Republican proposal to tie an extension to speeding up approval of the controversial Keystone XL oil pipeline. Republicans, in turn, blocked a Democratic effort to pay for an extension by increasing taxes on people who earn more than $1 million a year. That tax cut cost the government about $105 billion in Social Security tax revenue last year.

Meanwhile, President Obama vows to delay year-end vacations for himself and lawmakers if a deal isn't reached first.

While policy-makers spend a lot of time hashing out their differences, many Americans say they didn't even know there was an extra 2 percent in their paychecks last year.

"I honestly did not notice it, but I'm glad it's there" says Kyle Congdon, a student at Arcadia University just outside Philadelphia.

The payroll tax cut was worth about $1,000 to a family earning the median income of just over $50,000 a year. The cut was designed to put more money in people's paychecks, so they'll spend more and boost the economy, but whether that has worked isn't clear.

University of Michigan economics professor Joel Slemrod surveyed taxpayers and found that about half used the extra money to pay off debts. A third saved it and the rest spent it.

Given the concern about the economy, Slemrod says consumers are conservative with their money.

"They see their assets have fallen, their debt has increased, so they take advantage of higher disposable income to cut back on their debt or add cushion to their savings," Slemrod says.

On the streets of Glenside, Pa., it's easy to find those who say they saved the extra money.

"Anything I have left over at the end of the month ... is saved," says Mathew Danph, who supports extending — and maybe even expanding — the payroll tax cut. "More money sounds nice, whether it's saved or spent."

Down the street is Sweet Magnolia gift shop, where owner Maureen Haff believes extending and expanding the payroll tax cut would help small businesses.

"I would like to see the expansion of it," says Haff, "It's just the right time of the year, and people do want to spend."

"It may encourage them to spend a little bit," says Howard Gleckman of the Tax Policy Center, but he's more concerned about what will happen if lawmakers fail to reach agreement and headlines inform shoppers that they'll be paying more in taxes next year.

"I think if people believe that this money is going to be taken away from them, they're likely to be a little more cautious in their spending behavior over the holidays," Gleckman says.

While lawmakers bicker over ideological differences, something even more important to retail businesses may hang in the balance: a profitable holiday shopping season.

Copyright 2017 NPR. To see more, visit http://www.npr.org/.

AUDIE CORNISH, HOST:

The payroll tax cut was originally designed to put more money in people's paychecks so they'll spend more and boost the economy. NPR's Jeff Brady talked with holiday shoppers outside Philadelphia to see if that's working.

JEFF BRADY, BYLINE: In downtown Glenside, Pennsylvania, the shopping district is in transition. Near the high-end luggage store and a gift shop is a longtime pest control business with cockroaches and other bugs on display. Still, there are plenty of shoppers here with opinions.

KYLE CONGDON: My name is Kyle Congdon. I'm from Carbondale, Pennsylvania and I go to Arcadia University.

BRADY: So, there's been extra 2 percent in your paycheck over the last year. Did you notice it?

CONGDON: I honestly did not notice it, but I'm glad it's there.

BRADY: The tax cut boosted the average family's take-home pay by about a thousand dollars last year. But during an afternoon of talking with shoppers, none were aware of this.

JOEL SLEMROD: Well, by the way, we find the same thing in our research.

BRADY: Joel Slemrod is an economics professor at the University of Michigan. He also researched what taxpayers did with the extra money. A few said they spent it, about half said they used it pay off debts and a third said they saved it.

SLEMROD: They see their assets have fallen, their debt has increased so they take advantage of higher disposable income to cut back on their debt or add a cushion to their savings.

(SOUNDBITE OF DOOR CLOSING)

BRADY: Back with our shoppers near Philadelphia, it's not too difficult to find one of those savers. Mathew Danph stopped by a video game store.

MATHEW DANPH: Anything I have left over at the end of the month in the budget is saved. So, if there was 10 or 20 extra dollars in there, it was probably saved rather than spent.

BRADY: Even though Danph isn't complying with the theory behind the payroll tax cut - to get people to spend more and boost the economy - he supports extending and maybe even expanding it.

DANPH: More money sounds nice, whether it's saved or spent. I mean, for me, I'm probably going to save it but it sounds like a lot of people would spend it and seems like it would be beneficial for the economy.

BRADY: Just down the street in a gift shop called Sweet Magnolia, shopper Marlena Santoyo says expanding the tax cut now could help small businesses like this one.

MARLENA SANTOYO: I think especially, come to think of it, now at this season, Christmas or Hanukah, that, yes, some people would be inclined to do a bit of shopping.

BRADY: That assumes the tax cut is expanded. But what if the reverse happens and shoppers learn the tax cut will end soon and families will have less to spend next year. Here's Howard Gleckman of the Tax Policy Center in Washington.

HOWARD GLECKMAN: I think if people believe that this money is going to be taken away from them, they're likely to be a little more cautious in their spending behavior over the holidays.

BRADY: That prospect has business owners in this neighborhood hoping Democrats and Republicans will be able to reach agreement on at least extending the tax cut into next year. Jeff Brady, NPR News, Philadelphia.

(SOUNDBITE OF MUSIC)

CORNISH: You're listening to NPR News. Transcript provided by NPR, Copyright NPR.