Payroll Tax Cuts Wrong Strategy for Growth

 
 
February 08, 2012

Greater Impact from Reductions in Corporate, Personal Income Taxes

Washington, DC, February 8, 2012—While Congress considers extending a payroll tax cut in order to stimulate the economy, a new study from the Tax Foundation finds that payroll tax cuts have little to no impact on long-term economic growth. If policymakers are looking to stimulate the economy, they should be considering reductions to the corporate income tax and the individual income tax.

Recent research on similar countries shows that cutting the corporate income tax provides the most bang for the buck when it comes to economic growth,” said Tax Foundation economist Will McBride. "Given that the U.S. will soon have the highest corporate rate in the developed world, we have plenty of room to make reductions that will both make U.S. companies more competitive and stimulate domestic growth."

The political debate over the payroll tax holiday has revolved around possible short term growth effects, when in fact the bigger issue is a long run growth slowdown.  Since 2000 the U.S. has grown at a rate that is well below the average for similar economies. Over this period, social security payroll taxes do not appear to have any significant effect on long term economic growth.

In contrast, corporate income taxes have a highly significant and negative effect on long term growth.  Using data from the Organization for Economic Cooperation and Development (OECD), McBride's research suggests that cutting the corporate rate by 10 percentage points is associated with an increase in cumulative real GDP growth of 11.1 percentage points.  Personal income taxes on high incomes also have a significant negative effect on growth, such that cutting the rate by 10 percentage points is associated with an increase in cumulative real GDP growth of 7.5 percentage points over this period.

"The fastest growing economies in the OECD all have below average tax rates on both corporate and high income earners," said McBride. "The only one of the three major taxes where the U.S. boasts a lower rate is payroll – the one that matters the least for long term growth."

Tax Foundation Fiscal Fact No. 290, “Global Evidence on Taxes and Economic Growth: Payroll Taxes Have No Effect” by Will McBride is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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