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Goal Of Proposed Cut In Payroll Tax: Get More Into The Economy

Most of the details about the deal reached Monday between the White House and Republican leaders on taxes had been leaked in the days leading up to the announcement.

But the proposal to shave 2 percentage points off the 6.2 percent payroll tax for one year (2011) was a surprise.

On Morning Edition, NPR's John Ydstie talked with host Steve Inskeep about the thinking behind the proposed cut. As John said, workers pay that 6.2 percent on annual income up to $106,800. So if you earn a big salary, the cut would put about $2,100 into your pocket over the course of a year.

"You get a bit more money in each of your paychecks and it's more likely then that you'll spend it than getting a $1,000 or $2,000 check in the mail, which you might decide to save," John said. In other words, more money goes back into the still-sluggish economy — which needs some stimulus.

But what about the Social Security system, which the payroll tax funds? It's going to run out of money. Any cut in the tax, even for just a year, "will certainly be a hit to Social Security," John added, and so far, at least, "they're not talking about trying to make it up later."

There's more about the potentially stimulative effects of a payroll tax cut over at The Wall Street Journal's website. As it writes:

"How much it would affect the economy is open to debate. The one-year cut would total $120 billion. Proponents of payroll tax cuts argue that they are effective stimulus because they can be delivered quickly. Also, because they are concentrated on lower and middle-income workers, they are more likely to be pumped into the economy through increased consumer spending."

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