Payroll Tax Cut Is Unlikely to Survive Into Next Year The payroll tax holiday in 2012 reduced workers’

tax by $700 for an income of $35,000 a year and by $2,202 for incomes of $110,100 and over. If the tax holiday ends, the Economic Policy Institute recommends replacing the payroll tax cut with infrastructure spending.

Source: The New York Times, September 30, 2012

a. Explain how a payroll tax affects the beforetax and aftertax wage rate and employment and unemployment.

b. Explain the effects of an increase in infrastructure spending on employment and unemployment.

c. Explain which fiscal policy action would have the bigger effect on employment: continuing the payroll tax cut or new infrastructure spending.