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Will the Payroll Tax Cut add .6% to GDP next year?

December 10, 2010

Payroll tax cuts have relatively high GDP multipliers.  They add more than $1 to GDP for every $1 spent.  To get the impact on GDP from this tax cut, you need to multiply the size of the stimulus – which The CBPP (via Ezra Klien) says is $60B  – by the multiplier.

Mark Zandi estimated the multiplier to be 1.27 for a payroll tax cut in 2008 – let’s round up to 1.3 to make the math dead simple.

$60B * 1.3 = $78B

Now, divide by GDP to get the addition to GDP

78B/14834B = .52%

Wow – that is great! This tax cut should add over .5% to GDP next year.  I got the estimate of GDP from forecasts.org

However, I suspect the impact on GDP will be closer to .6%.

The reasons for this are simple: tax receipts go up a lot in strong recoveries, and we could have better than expected jobs growth and hours worked.  If this is the case, say we add .5 to hours worked, and add jobs too, then it is totally possible for the tax receipts to come in 15% stronger than 2010, which is then multiplied by 1.3!

Let’s redo the numbers with 15% more

60b *1.15 *1.3 = .6%

Not bad for $60bn in spending!

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