Extending Payroll Tax Cut Would Keep 1.1 Million People Out of Poverty

December 2, 2011 at 5:15 pm

The goal of a payroll tax holiday is to temporarily shore up consumer spending for working households; no one would mistake it for targeted antipoverty policy.  Yet, it does have the added benefit of reducing poverty.

Using Census Bureau data for 2010, I estimate that the current payroll tax holiday, which expires at the end of the month, would keep roughly 1.1 million low-income workers and their family members above the poverty line next year if Congress extends it.  (A bill by Senator Casey to extend and expand the tax holiday, which the Senate rejected yesterday, would have kept 1.7 million people out of poverty.)

Those figures reflect only the tax cut’s direct impact on workers; they don’t include any effect of the tax cut on preserving jobs in the broader economy by boosting consumer spending— which, after all, is the main point of the tax holiday.

To make this estimate, we can’t use the official poverty measure because that only counts pre-tax, cash income.  Instead, we use a broader measure recommended by the National Academy of Sciences and preferred by many experts; it counts income after taxes and non-cash benefits, subtracts certain medical and work expenses, and uses a slightly modernized poverty line.

The fact that the tax holiday reduces poverty somewhat doesn’t mean that it mostly benefits struggling families — it targets virtually all workers, and only about 7 percent of the money goes to families with cash income below $30,000.  Compare that, for instance, with another credit that targeted virtually all workers:  the President’s Making Work Pay Tax Credit, which expired last year, provided 18 percent of its money to that group.

Still, by extending the payroll tax cut — as well as expanded federal unemployment insurance, which kept more than 3 million people out of poverty last year but expires at the end of the month — Congress can provide critical help to a still-weak economy while fighting poverty at the same time.

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More About Arloc Sherman

Arloc Sherman

Sherman is a Senior Researcher focusing on family income trends, income support policies, and the causes and consequences of poverty.

Full bio | Blog Archive | Research archive at CBPP.org

3 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. Lyle Courtsal #

    Tax cuts only work if a person is making an adequate family wage job; doesn’t work for long term unemployed, homeless, elderly, and disabled. I am working on adjusting consumer price index as it relates to social security cost of living adjustment. Got a 3.6% increase; should have been around 7-10% for any impact on spending power; extra money ate up in rent increases, health insurance premium increases.

  2. 2

    As I wrote in my post of December 2nd, anything that even hints at touching the funding mechanism for Social Security (especially something that attaches it to the General Fund) should be avoided like the plauge.


    Chad (The Left) Shue

  3. Robert Baker #

    Although extending the payroll tax holiday will help the economy recover; we would be better off doing it another way to help working Americans. The payroll tax at full strength is necessary to secure the future of Social Security. In fact, we should grow that tax to make it less regressive by extending it to earned wages over $106.000 instead of letting wages above that amount go untaxed. Such a change would secure Social Security for the indefinite future. If we are going to temporarily extend the payroll tax holiday, we need to be careful how it is sold, as argued by this article from the Economic Policy Institute: http://www.epi.org/blog/stop-digging-deeper-hole-argue-payroll-tax/

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