The Truth About Extending Payroll Tax Cuts and Unemployment Benefits

Part of President Obama’s push to create more jobs revolves around cutting payroll taxes by 2% and extending unemployment benefits, giving people more money to spend and businesses an incentive to hire more workers. Obama’s plan would not issue new cuts to payroll taxes, only extend those already in place as part of a tax-cut deal with congressional Republicans last year, reducing workers’ levy from 6.2% to 4.2%.

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Many Americans are skeptical as to whether the plan would actually create jobs and spur economic growth. After all, the U.S. gross domestic product only rose at an annual rate of 1.3% in the second quarter, and though it improved slightly in July, unemployment remains high at 9.1%, and all this while payroll taxes were already reduced and unemployment benefits were extended to their current level.

Unemployment benefits were adjusted in 2009 to last a total of 99 weeks, and have been reauthorized a total of five times at that length. The unemployment benefits extension cost the government $112 billion, while the payroll tax cut has cost the government $56.5 billion in lost revenue.

The payroll tax cut gave the average family $1,000 more to spend. According to Joel Prakken, senior managing director at Macroeconomic Advisers, the payroll tax has so far contributed to a 0.4% increase in economic growth and lowered the unemployment rate by 0.2%, or roughly 300,000 jobs.

However, some worry that extending unemployment benefits discourages people from looking for work, keeping unemployment rates high, though Prakken says there’s no contesting that it stimulates spending. He says extended benefits have likely added 0.4% to economic growth.

According to the President’s Council of Economic Advisers, every dollar of government spending on unemployment benefits boosts the economy by $1.60. Congress’ Joint Economic Committee says that ending those benefits would drain $80 billion from the economy and destroy 1 million jobs.

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