A Two-Month Payroll Tax Deal Isn't Worth Passing

US Capitol Building

It's not exactly popular to take the side of House Republicans on the payroll tax fight right now.

But the fact is that the House Republican leadership is right about the Senate Bill: we can do better than a two-month payroll tax deal.

Moreover, a two-month deal isn't worth the paper money the government won't collect.

People tend to spend out of what economists call their permanent income. The more temporary a tax cut is, the less likely it is to affect consumer spending decisions. Because the additional income is only temporary, spending habits will not be changed much. In fact, people might save most of the additional income because they know that when the payroll tax holiday is over, their income will shrink again.

The government needs to make a credible commitment to keep tax rates low for, as the Federal Reserve says, an "extended period of time." Otherwise, there will be no stimulus effect at all.

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