How stimulative will the payroll tax cut be?

Tomorrow is payday for staffers like myself at Money Magazine. And according to a story written by colleague, Jeanne Sahadi, I should get a fatter check: the payroll tax cut written into this year’s economic stimulus package should take effect today, April 1.

The tax cut, officially known as the Making Work Pay credit, is as much as $400 for single filers in 2009 and 2010, and $800 if you’re married and filing jointly. There are income limits to qualify: For singletons, the tax break begins to phase out if your modified AGI is between $75,000 and $95,000 (after which, the credit disappears entirely). For couples, the phase-out range is $150,000 to $190,000.

If you qualify, don’t expect to see a triple-digit boost next payday. Unlike the rebate checks mailed out last summer, this stimulus will be doled out gradually through a reduction in your federal withholding taxes.

Why this approach instead of a lump-sum? Well, some economists argue that consumers are more likely to spend the extra money if the rebate is viewed as income. With a sudden windfall, we’re prone to save the money (Consider refunds at tax time. Many people use that money to pay down debt or boost savings). James Surowiecki gives a great overview in his story in the January 26 issue of The New Yorker.

So will it work? I took an early peek at my paycheck to see just how much more money I’ll be taking home every week. (I’m single and qualify for the full $400 credit.)

The grand total: $20.

Am I likely to put the extra $20 toward savings? Nope. Is it more likely I will spend it? You bet.

Will it go far in stimulating the economy? Of that, I’m not so sure.

To make up for a budget shortfall, the MTA in New York City just passed a significant fare hike. Pretty soon, I’ll pay $103 for a monthly subway pass, up from $81. Sales tax in some parts of the country is jumping to nearly 11%. And while inflation is relatively flat these days, the cost of big-ticket items such as health care and education aren’t getting any cheaper.

So for my part, I think the economic stimulus will go toward paying for a more expensive subway pass. For others, the money will help cover higher sales tax.

Sure, every little bit helps. But I wonder if a year from now, for the sake of an economic recovery, we’ll have wished we got a lot more.

–Carolyn Bigda

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