The Congressional battle to extend the payroll tax cut was messy and protracted. It pitted House Republicans against the White House, but on opposite sides of the issue than the expected party norm.
Photo: New York Fed
When a 10 month extension passed in February, it seemed like a minor miracle.
It was argued that the tax cut would stimulate the economy, giving a family with median income an extra $1000 dollars. The New York Fed took a look at how people said they would spend the windfall, what actually happens, and how that might affect the economic boost from the tax cut.
- More than half of those surveyed intended to use the majority of the tax cut to pay off debt, and only 8.8% intended to use most of it for consumption. 35% of those surveyed ended up spending a majority of the extra funds.
- People tended to follow their stated intent, albeit with a high degree of inconsistency. A common trend was a tendency to spend more than intended.
- Congressional inability to pass a long term extension may have made the policy less effective as stimulus. People that thought the cut would be extended long term intended to spend more of it.
- The inconsistency of people’s desires and actions suggests that when tax cuts are spread out across paychecks, people are less likely to notice them. They may spend more of these cuts than a large rebate, which is more noticeable and spent more deliberately.
We haven’t heard the last of the issue, the tax cut expires at the end of the year. It is part of what’s being called a fiscal cliff that could drag on the U.S. economy to the tune of 1-3% of GDP. We can’t count on a new Congress to work it out, the provisions expire at the end of this year. If the fight over this one tax is any indication, it will be a difficult fight.