What Happens To The Economy If The Payroll Tax Cut Expires?

Yesterday, House Speaker John Boehner (R-OH) threw cold water on a temporary extension of the soon-to-expire payroll tax cut that had passed overwhelmingly in the Senate on Friday. “Well, it’s pretty clear that I and our members oppose the Senate bill,” Boehner said, despite the fact that on Friday he had called it a “good deal” and a “victory.”

House Republicans intend to vote down the Senate’s bill tonight, leaving the issue unresolved. But what happens if the payroll tax cut is allowed to expire? According to several economic analysts, it would severely affect growth and job creation next year:

— According to Macroeconomic Advisers, allowing the payroll tax cut to lapse “would reduce GDP growth by 0.5 percent and cost the economy 400,000 jobs.”

Barclay’s estimated that letting the cut expire would knock 1.5 percent off of first quarter growth next year.


Ameriprise Financial Services estimated that extending the cut “is likely to add between 750,000 to 1 million jobs.”

Susan Wachter, a finance professor at the University of Pennsylvania’s Wharton School, calculated that the payroll tax cut “would add 1 percentage point to economic growth and create 1 million jobs next year.”

Regional Economic Models Inc. estimated that the cut would pump “$120 billion into U.S. households in 2012.”

“If the Europe mess weren’t there, there would be a good case for letting taxes go back up,” said Joel Prakken, the chairman of Macroeconomic Advisers. “But a combination of a big tax increase plus the threat from Europe, when the economy is still in the doldrums — why take that risk?” If the House does vote down the Senate’s bill, the Senate will have to come back into session in order to craft a final agreement.