The answer: Pretty effective.
Apparently better than many economists expected. The data seems to show that payroll tax cuts are more effective than cuts that effectively come as lump sums.
From the WSJ’s Workers Spent More of Payroll Tax Cut Than They Intended:
In a new study, economists at the Federal Reserve Bank of New York come down on one side of this debate: They find lowering the withholding rate — the method used in the Obama Administration’s 2011 and 2012 payroll-tax cuts — led U.S. workers to spend a bigger chunk of their extra income — and more than they intended to.
The economists, Grant Graziani, Wilbert van der Klaauw and Basit Zafar, surveyed workers in early 2011 and then in December 2011 to gauge the effects of the 2011 pay-roll tax cut, which reduced the withholding rate from paychecks (for Social Security and Medicare) from 6.2% to 4.2%. This policy, which affected around 155 million workers, was eventually extended for all of 2012—but recently expired amid Washington’s “fiscal cliff†fight.
The Fed researchers found that nearly 52% of respondents who intended to mostly save the extra cash, and nearly 19% of those who wanted to mostly pay off debt, ended up spending most of the windfall. Over 70% of those who originally intended to spend most of the funds did so. All told, about 36% of the extra income was spent by respondents — a relatively large figure.
Also: “High-income Americans used the largest share of their tax-cut funds for spending, while low-income workers used most of the cash to pay down debt.”
The additional spending in 2011 and 2012 were obviously critical for maintaining the fragile recovery. And the additional household debt reduction has poised many families in better positions going forward.
Yes, the payroll tax cut increased the deficit and added to the debt, but it seems like it was fairly effective as stimulus — and may have been a crucial factor in avoiding a double dip recession.