Holiday Break?

Category: Blog

One of the tax increases set to happen automatically in January 2013 as part of the fiscal cliff is the expiration of the “payroll tax holiday.”  The holiday temporarily reduces the tax paid by workers on the first $110,000 of income to fund Social Security from 6.2% to 4.2%, saving workers an average of about $1,000 a year.

This tax cut, enacted in late 2010, was meant to boost workers’ incomes and spending to spur economic recovery in light of the financial crisis and recession of 2008-2009.  Many expected it to expire as scheduled, due to its high costs, concerns about the effects of lost revenue on Social Security, and preferences by President Obama and Congressional leaders to salvage other programs from the “fiscal cliff.”  Rachel Younglai and Kim Dixon of Reuters report, however, that support for extending the payroll tax holiday is increasing among Congressional Democrats.

The revived debate on this policy raises several key tradeoffs that policymakers must consider when making changes to these automatic trigger laws.   In essence, they must balance the competing goals of continuing to support job and income growth in a still-fragile economic recovery while addressing long-term concerns about deficits and debt.  While weighing these considerations, policymakers must also consider how the design of tax policy can have serious implications for fairness and economic growth.

Teachers may therefore want to raise this issue as an extension to the economics lessons on Taxation and the National Debt and Balancing the Federal Budget, or as a current events lesson in an economics or civics class.  The debate over extending the payroll tax holiday bears directly on the essential dilemmas of these two lessons: how can we fairly and efficiently fund public goods and services, and when should balancing the budget be a priority?

Students can read the Reuters article and take note of the reasons given for changing opinions about the payroll tax holiday.  Students can then consider why support is “rising” – in other words, why didn’t members of Congress support extending the tax cut all along?  What are some possible reasons for not extending the tax cut?  What questions do students have about the tax cut?

Students will likely mention the cost, which the Reuters article reports to be about $100 billion.  Teachers can encourage students to think more deeply about what the cost represents, in terms of the opportunity cost – what else could be done with that $100 billion?  Encourage students to read articles from NPR and the New York Times that predicted just recently that the payroll tax holiday would not be extended – do the reasons given in the article comport with those brainstormed by the students?

Finally, teachers can show students this graph, created by Ezra Klein based on estimates of the economic impact of the payroll tax holiday by Moody’s Analytics:

Klein Graph

Students should consider whether this graph changes their impression of the payroll tax holiday, and what more they would need to know to be able to make a recommendation to Congress on whether or not it should be extended.

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