Arguing Over A Tax Cut Nobody Notices

Dec 11, 2011

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 Barack 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 tax payers 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, Penn., 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.

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