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A Project of The Annenberg Public Policy Center

Bachmann’s Bad Economics

Michele Bachmann wrongly claims there is “not one shred of evidence that lowering the payroll tax rate created jobs.” Actually, the economy has gained more than 1.4 million jobs in the 11 months since the payroll tax holiday began.

That’s 84 percent more jobs than were added in the same period a year earlier. The unemployment rate has fallen from 9.4 percent in December 2010, just before the payroll tax was reduced temporarily, to 8.6 percent in November.

By itself, of course, the acceleration in job creation doesn’t prove that the payroll cut was the cause. There are many forces at work in the economy. But there is widespread agreement among economists — whose job it is to study all the evidence and tease out the effects of different variables — that cutting payroll taxes creates jobs. The director of the nonpartisan Congressional Budget Office testified last month that cutting the Social Security payroll tax would increase take-home pay and, in turn, “spur additional spending” and “increase production and employment.” Economist Joel Prakken, among others, agrees. He says keeping the Social Security tax rate at 4.2 percent for one more year, rather than let it return to 6.2 percent, would create 400,000 jobs in 2012.

The Social Security tax rate on workers’ paychecks was reduced this year by 2 percentage points, from 6.2 percent to 4.2 percent, as part of a bipartisan agreement to extend the Bush tax cuts for two years. But the payroll tax cut expires at the end of the year. The president’s jobs bill would further cut the Social Security tax next year to 3.1 percent for employees and extend it to employers on the first $5 million of their payroll expenses. The Republicans, however, blocked the measure because it would be paid for by imposing a surtax on millionaires. Discussions, however, are continuing.

On the Dec. 6 broadcast of MSNBC’s “Morning Joe,” Republican Rep. Bachmann reiterated her opposition to the payroll tax cut.

Bachmann, a Republican candidate for president, told host Joe Scarborough that there’s no evidence it created jobs.

Bachmann, Dec. 6: I still oppose that payroll tax cut. And also, President Obama said that it would create jobs. There’s not one shred of evidence that lowering the payroll tax rate created jobs. So his premise was wrong, but also, it’s hurting senior citizens. I won’t do that.

Scarborough: So you, you just, you don’t think it’s stimulative.

Bachmann: No, it’s not stimulative.

Scarborough: You don’t think it creates jobs.

Bachmann: If it was stimulative, I … thank you for saying that point, because that is also another reason to oppose it, because it wasn’t stimulative and that was the president’s point.

She’s way off base here. Economists see ample evidence that cutting payroll taxes creates jobs, as CBO Director Douglas Elmendorf told a Senate committee on Nov. 15 in a 52-page prepared statement titled “Policies for Increasing Economic Growth and Employment in 2012 and 2013.”

CBO, Nov. 15: The increase in take-home pay would spur additional spending by the households receiving the higher income, and that higher spending would, in turn, increase production and employment. Those effects would be spread over time, however, and CBO expects that the majority of the temporary increase in take-home pay would be saved rather than spent.

CBO estimates that reducing employees’ payroll taxes would raise output cumulatively in 2012 and 2013 by $0.10 to $0.90 per dollar of total budgetary cost. CBO also estimates that the policy would add one to nine cumulative years of FTE employment in 2012 and 2013 per million dollars of total budgetary cost.

Other economists agree. In August, Joel Prakken of Macroeconomic Advisers projected that merely extending the current 4.2 percent payroll tax rate for one year would “boost real GDP growth 1/2 percentage point over the year, and raise employment 400,000 by the fourth quarter, assuming (as we do) that employers don’t use the holiday as an opportunity to limit raises and or bonuses.” In an email to us, Prakken said he stands by his job-creation estimate.

If Congress cut the payroll rate even further — to 3.1 percent — the economy would add 750,000 jobs, Moody’s Analytics chief economist Mark Zandi told a Senate committee in September.

There is disagreement, however, on the impact of extending the payroll tax cut to employers.

CBO and Zandi say it will create even more jobs, but Prakken called it an “ineffective way” to increase employment. “In our modeling, a cut in the employer share of payroll taxes goes almost entirely into profits with little effect on either GDP or employment,” Prakken wrote in his August analysis.

One last thing: There is no evidence that the payroll tax cut is “hurting senior citizens,” as Bachmann claims. The law enacting the payroll tax requires the federal government to replace all revenue that otherwise would have gone to the Social Security Trust Fund.

— Eugene Kiely, with Dave Bloom