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1 William McBride, Global Evidence on Taxes and Economic Growth: Payroll Taxes Have No Effect 1 (2012)

handle is hein.taxfoundation/ffcjaxz0001 and id is 1 raw text is: 1111\ ..... \\\...122 \gg . .....' \\\\,g February 8, 2012 No. 290 Global Evidence on Taxes and Economic Growth: Payroll Taxes Have No Effect Focus Should Be on Cutting Corporate and Individual Income Taxes By William McBride Introduction Congress is currently debating whether to extend throughout the year the payroll tax holiday, which is currently set to expire at the end of February. The original holiday lasted all of 2011 and reduced the employee share of Social Security payroll taxes from 6.2 percent to 4.2 percent. The two-month extension that passed in December reflects the difficultly in agreeing how to pay for a full-year extension. This is because the budgetary cost of a full-year extension is considerable: about $120 billion according to the Joint Committee on Taxation. Proponents of the holiday argue that the economic recovery is fragile, that continued short-term stimulus is in order as a result, and that the payroll tax holiday is particularly effective in this regard because it puts cash in the pockets of those most likely to spend it. While there is a certain appeal to this argument, many economists have a different view of the short-run dynamics of stimulus measures in general and this payroll tax holiday in particular. The long-term growth effects of a payroll tax holiday extension are worth considering as well, as the U.S. appears mired in a long run of slow growth. Here the evidence is quite conclusive: Based on OECD data on 34 member countries between 2000 and 2010, there is no significant relationship between payroll taxes and long-term economic growth. In contrast, corporate income taxes have a highly significant and negative effect on long-term growth. The estimates suggest that cutting the corporate rate by 10 percentage points is associated with an increase in total real GDP growth of 11.1 percentage points over the period. This would move the U.S. from below average to above average in terms of economic growth among OECD countries. Personal income taxes on high incomes also have a significant negative effect on growth, such that cutting the rate by 10 percentage points is associated with an increase in total real GDP growth of 7.5 percentage points over the period. This would bring the U.S. to roughly an average level of growth relative to OECD peers. The U.S. will soon have the highest corporate income tax rate among OECD countries and it already has the most progressive income tax systems of any industrialized nation.' Thus, the evidence strongly suggests that the key to boosting long-term economic growth in the U.S. is to cut tax rates on corporate and individual income. William McBride is an economist at the Tax Foundation.