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Home Publications Blogs Beat the Press The Tax Cut Stimulus That Isn't: The Washington Post's Failed Analysis

The Tax Cut Stimulus That Isn't: The Washington Post's Failed Analysis

Monday, 10 January 2011 07:37

A front page Washington Post article assessed the amount of stimulus that would likely be coming from the 2 percentage point cut in the payroll tax. While the article did note that many low-income workers will actually be paying more in tax in 2011 than 2010, because of the expiration of the $400 Making Work Pay tax credit, it failed to note the more important point for this discussion, that most workers will see little change in their tax liability.

For example, a worker with the median annual earnings (@ $31,000) would receive a tax cut of $620 as a result of the reduction in the payroll tax. Since they are losing the $400 Making Work Pay tax credit, their net tax cut would be $220 over the course of the year. This is the amount of additional income that could provide a potential stimulus to the economy, not the full $620.

The article failed to make this correction, for example reporting projections of the tax cut's impact from Mark Zandi at Moody's Analytics that did not incorporate the impact of the ending of the Making Work Pay tax credit. The Zandi projections show the boost to the economy compared to a situation in which there was no tax cut at all, not the incremental boost associated with the difference between the payroll tax cut and the Making Work Pay tax credit.

The piece also inaccurately depicted the current 5.3 percent savings rate. It noted that this savings rate is well above the near zero rate that existed at the peak of the housing bubble, however it did not mention that the current saving rate is still well below the post-war average of 8 percent. Given that the current rate is still lower than normal, and that many near retirees have just seen much of their wealth disappear with the collapse of the housing bubble, it is more reasonable to expect that the saving rate will go up than down.

Comments (9)Add Comment
written by liberal, January 10, 2011 7:27
What fraction of "savings" is in fact debt being written off?
written by izzatzo, January 10, 2011 8:43
Using a more narrow definition of Ceteris Paribus necessary to isolate incremental change - all other things equal - free market economists predicting effects of tax cuts have decided to move to the level of second derivatives and predict only the change in the change of GDP spending.

They explained that this explodes the multiplier effect of spending by the private sector while sharply diminishing increased debt from lost tax revenue for the government sector.
written by dfairbanks, January 10, 2011 11:17
The Making Work Pay tax credit wasn't talked about or renewed because the people making the new tax rules weren't going to be affected by its expiration. My local economy just lost $80 a month from my family.

Workers in my tax bracket feel totally betrayed.
WP Ombudsman
written by bailey, January 10, 2011 1:24
What's the role of the Wash. Post Ombudsman if it's not to act in WP reader's interest? How does the paper respond to your continued requests that it set the record straight?
How much of that net tax cut of $220 per year
written by Bill H, January 10, 2011 6:19
will be offset by an increase in the deduction for the employee share of the cost for health insurance? Our employyer share increased 24% this year, after increasing 18% last year.
written by Bill H, January 10, 2011 6:20
Sorry, that should be "employee share."
written by skeptonomist, January 11, 2011 8:28
Dean tends to relate everything to the housing bubble, but I have to point out again that the downward trend of savings was a long-term thing that really began much earlier, even before the stock-market bubble of the late 90's:


The asset bubbles do not appear to be a good explanation for this trend.

Data from the BEA:
written by liberal, January 11, 2011 11:01
skeptonomist wrote,
...the downward trend of savings was a long-term thing that really began much earlier...

Hmm...maybe it has to do with trends in the trade deficit?
written by Calgacus, January 12, 2011 12:54
You can't save money you don't have. Trade deficits (=foreign savings of US dollars) and taxes and government surpluses (= destruction of dollars) subtract from net domestic savings to the penny. These lowered savings and destabilized a not very stable US economy quite some time ago.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.