Home > Main > Zero Stimulus from Payroll Tax Cut: Or How Higher Oil and Gas Prices Ruined our Recovery

Zero Stimulus from Payroll Tax Cut: Or How Higher Oil and Gas Prices Ruined our Recovery

June 16, 2011

I bet you’re wondering exactly why I’ve been posting over and over about the price of oil.

I was extremely bullish on the United States economy earlier in the year, when the tax cuts were announced.  I thought these specific cuts were going to do wonders for the United States economy.

Unfortunately, the tax cuts have had zero stimulus impact so far. The entire stimulus has been eaten up by higher energy costs.

The payroll tax cuts were expected to add about $110 billion to the pocketbooks of consumers over 2011.  This ends up being about .8% of GDP in raw numbers.  .8% of GDP is a big boost to the economy.  This does not inclue the multiplier effect.  If we use an estimated 1.3 as a multiplier, we get over 1% of GDP impact on the economy from the payroll tax cuts.  Great!

But then something absolutely wonderful happened- the Libyan Civil war.  But, it had horrible side-effects on the U.S. economy.  The Libyan Civil war caused a spike in energy and gasoline prices.

The estimated cost to the consumer for the increased energy costs is about $120bn over the course of a year.  This number is about the size of the payroll tax cut.  The entire years worth of tax cuts was to be worth about $110bn.

Basically, the entire payroll tax cut went to pay for increased energy costs.  There was zero stimulative effect due to tax cuts, because they went to pay for increased energy costs.

I do not know why the U.S. government did not open up the Strategic Oil Reserve and pay whatever price necessary to get Saudi Arabia to sell that oil.  They should have done this back in March.  But they did not open the SOR. So here we are in June, still struggling, while the propagandists at Forbes claim the tax cuts did not work.

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  1. Detroit Dan
    June 18, 2011 at 4:40 pm

    Also, the “Making Work Pay” tax credits expired at the end of 2011, so the net new tax cut from the 2011 payroll tax was much less than $110 billion.

    • TC
      June 19, 2011 at 4:54 pm

      Good point. I had forgotten about the making work pay tax cuts. let me see.

      the making work pay tax cuts were planned on costing $600bn over 10 years. This makes it worth roughly $60bn a year. The payroll tax cut probably added about $50bn on top of that, so it was more stimulus. But like you said, not that much more.

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