The President’s Plan for the Payroll Tax

A key piece of President Obama’s jobs plan is to extend the temporary 2% payroll tax cut enacted last December for another year. The plan would also expand the payroll tax break by cutting in half the rate businesses pay on their first $5 million in payroll. It would also eliminate payroll taxes for businesses that add new workers or increase wages (capped at the first $50 million in payroll increases).

To help make sense of this proposal, bloggers at the Washington Post have written a brief backgrounder on the payroll tax and the president’s proposed changes.

Mark Zandi, chief economist of Moody’s Analytics, asserts that the payroll tax cuts “would give firms a substantive incentive to increase hiring and should result in a large economic bank for the buck – additional GDP per tax dollar – than previous job tax credits.” On the other hand, William McBride at the Tax Foundation contends that the payroll tax holiday won’t work and “dangerously” cuts into the federal government’s largest stable source of revenue.