Skip to comments.Confirmed: The Payroll-tax holiday was a big nothingburger (Gimmicky stimulus effort did nothing)
Posted on 02/08/2013 7:42:16 AM PST by SeekAndFind
This should be a lesson to politicians and economists about the nature of gimmicky “stimulus” efforts …. but probably won’t be. In the pressure cooker of the tax fight over the holidays, most people forgot about the payroll-tax holiday — the reduction by two percentage points of FICA withholding for Social Security. Its backers claimed that putting $20 a week in the hands of earners would boost spending and the economy, which turned out to be entirely false. They then claimed that the expiration of this temporary stimulus would tank the economy through reduced spending.
And that also turns out to be false. The Washington Post is (mildly) shocked, shocked to find people spending money anyway:
Some of the nations largest retailers posted solid gains in January even though shoppers were hitting the malls with smaller paychecks.
The results reported Thursday offer the first glimpse into how the expiration of the payroll tax cut is affecting household budgets. A worker making $50,000 a year faces a decrease of $1,000 in take-home pay over the course of the year, and economists predicted spending would fall off. But many companies found that shoppers were more resilient than expected.
According to the International Council of Shopping Centers, retail sales rose 4.5 percent in January compared with a year ago. The data cover sales at stores open at least a year for 22 national chain stores.
Simply put, January was an outstanding month, Macys chief executive Terry J. Lundgren said.
The Post also cautions that this is more or less anecdotal still. Official retail numbers don’t come out until next week, and stores like Wal-Mart don’t post monthly results. Still, with higher-end retailers like Macy’s and Nordstrom’s posting double-digit increases, and mid-market retailer Kohl’s following suit, it seems unlikely that a discounter like Wal-Mart would be hard hit in the same period.
Surprised? Don’t be. The payroll tax holiday didn’t do anything positive for retail sales when it was implemented, as I explained last year when I first pointed out that its expiration was approaching:
Both sides sold the payroll tax holiday as an economy-stimulating policy. As such, though, it simply followed the failures of Barack Obamas Making Work Pay weekly tax rebate and George Bushs lump-sum tax rebate. The numbers involved, about $20 per week, hardly constitute an incentive for spending freely. In the first year of this particular holiday season, personal consumption expenditures (PCE) increased by 3.1 percent (annualized) in the first quarter, but then only rose 1.0 percent, 1.7 percent, and 2.0 percent in subsequent 2011 quarters. In the year prior to this policys enactment, PCE grew at more than 2.5 percent each quarter, hitting 4.1 percent in the final quarter before Congress passed this particular stimulus. Its possible to argue that these 2011 numbers might have been worse without the tax holiday, but its impossible to argue that it led to resurgent economic growth.
Furthermore, this holiday comes with a price. The money comes out of the Social Security Funds revenue stream, which already doesnt produce enough income to cover outgoing expenditures. This stimulus measure is aptly named, as it provides a holiday from fiscal sense in a program that is already on the road to insolvency, if not as quickly as Medicare. At least in principle, this tax cut doesnt keep funds from the government it takes it from the retirement funds of the taxpayers themselves, just as if the money had come out of a 401(k) account.
The decision to spend doesn’t come from government stimuli. The payroll-tax holiday joins its predecessors like Making Work Pay and the 2008 Bush stimulus checks that purport to push economic growth by temporarily allowing people to keep a little more of their own money. It’s yet another Cash-for-Clunkers gimmick that doesn’t drive anything but instability and ambiguity.
If we want real economic growth, then we need tax reform that eliminates those two qualities and allows Americans to spend and invest with confidence. That’s the lesson from the payroll-tax-holiday nothingburger, but don’t expect politicians to learn it unless we teach it to them — and then test them on it at the ballot box.
Update: The New York Times spins a very different tale, pointing out how the payroll-tax holiday expiration hit poor families — and supposedly retail sales, too (via JWF and Instapundit):
Jack Andrews and his wife no longer enjoy what they call date night, their once-a-month outing to the movies and a steak dinner at Logans Roadhouse in Augusta, Ga. In Harlem, Eddie Phillipss life insurance payment will have to wait a few more weeks. And Jessica Price is buying cheaper food near her home in Orlando, Fla., even though she worries it may not be as healthy.
Like millions of other Americans, they are feeling the bite from the sharp increase in payroll taxes that took effect at the beginning of January. There are growing signs that the broader economy is suffering, too.
Chain-store sales have weakened over the course of the month. And two surveys released last week suggested that consumer confidence was eroding, especially among lower-income Americans.
While these data points are preliminary more detailed statistics on retail sales and other trends will not be available until later this month at street level, the pain from the expiration of a two-percentage-point break in Social Security taxes in 2011 and 2012 is plain to see.
So other than a vague reference to a consumer confidence number, what other data does the NYT have to show retail sales falling?
Complete monthly data for retail sales in January will not be released until later this week, but the weekly data already available for last month showed a steady deterioration in shopping activity.
What weekly data? That’s never explained. The NYT offers a half-dozen anecdotes from people who say they are buying less, while the Washington Post uses actual sales figures from retailers that tell an entirely different story. One of these two have gotten the story entirely wrong, and I’m pretty sure it’s the one without any real data.
* FIX IT (Make it competitve).
* FLATTEN IT ( Make it simple and understandable ).
* FORGET IT ( Make it permanent ).
All these tinkering around the edges ( 2 years, 3 years, temporary, etc ) will only make it DIFFICULT TO PLAN ahead for businesses and cause more UNCERTAINTY.
No one will think of hiring with uncertainty.
Also, a word about that other term being used TARGETTED.
That word is code for CRONY CAPITALISM, FAVORITISM and PORK BARREL SPENDING.
No matter how smart you think you are, you simply CANNOT KNOW which sector of the economy will be competitive to meet demand. LET THE MARKETS DECIDE AND STAY OUT !
Well the $60 out of my paycheck every 2 weeks sure as crap hurts me! Giving my money so illegals and bums can live for free. I feel great
It did more than nothing. On the government side it might have done nothing. But there are a whole lot of Low Information voters who just found out Obama lied to them and raise their taxes when their checks shrank.
“... putting $20 a week in the hands of earners”
now that $20 or $60 a week is being put in the pockets of the sleazy SSDI lawyers.
What a wonderful world we have.
Repeal the 16th amendment. Then institute 10% trade tariffs and a NRST of 5%. Watch the economy skyrocket. They only income tax would be the payroll tax for social insecurity an mediscare.
It may have had no positive impact on the economy, the expiration most definitely IS impacting the economy... It is perceived as a tax increase and has the same impact as a tax increase.
Yep, that’s real money.
But, cutting the contributions to social security was the DUMBEST place to cut taxes.
Of course, he did it that way because the left always complains that actual income taxes only benefit “the rich” more than others.
How about replacing the payroll tax with a 1% national sales tax to fund SS and Medicare.
RE: How about replacing the payroll tax with a 1% national sales tax to fund SS and Medicare.
I’ll agree with with that with the following caveats:
1) HOW DO YOU PREVENT THE FEDERAL GOVERNMENT FROM RAIDING THE SS FUND AND STUFFING IT WORTHLESS IOU’s LIKE IT IS DOING NOW?
2) Current SS payout for retirees is based on the percentage of your salary taken from you. The higher your salary, the bigger you the amount you get per month when you retire.
How is a 1% sales tax going to replace this system?
This would mean everyone gets the same monthly amount when they retire regardless of current income.
The only thing the payroll tax holiday did was add to government insane spending & borrowing. That tax is supposed to help fund Social Security (another out of control federal program) and without the tax, our government just goes deeper into the hole.
The tax holiday didn’t help our sick economy or lack of jobs problem. Short term gimmick fixes are just distractions politicians use to fool us.
10% tariff might get you $250 billion, 5% NRST would give you $500 billion if sales triple. And allowing the government to keep collecting payroll tax will cause the nation to go bankrupt in about 12 years.
I like the concept, but you’re not gonna sell many people on cutting the Federal Government by 75%.
Mmmmmmmmm, Nothingburgersssss, arrrrggggaaaa ...
Homer J. Simpson
That’s the whole point. Under the Constitution, all citizens are supposed to be treated equally. Everyone should get the same amount. Social Security should be a last resort poverty insurance for Seniors, not a Ponzi scheme ‘pension.’
If you want to retire in comfort, save for it. And if you care about your kids, you can get a hybrid life insurance policy that they can use as a lifelong savings and loan vehicle, with a million dollar value around age 60.
The whole reason we are in this mess is the idea that Government can guarantee comfort for every single person. There isn’t enough money in the world to pay for that unless everyone’s retirement contributions are invested in a growing economy.
1. There would not be a trust fund. Just pay todays retirees every month. No need to set money aside for future retirees.
2. Yes everyone would get the same. That should be a raise for low income earners and a decrease for the wealthy. It also would be a 7.65% increase in current wages so everyone could immediately contribute more to their own IRAs.
Maybe they can explain how the Hundreds of Millions of dollars affected Social Security,which is where that money came from.