NCPA - National Center for Policy Analysis

Payroll Tax Holiday

December 3, 2001

One idea for an economic stimulus package is a one-month Social Security payroll tax "holiday." Advocates think it could be implemented more quickly than other proposals, and would most help those with lower incomes -- who are also more likely to spend it.

However, payroll professionals say it would take six months to effect all the necessary accounting and software changes for a one-month payroll tax holiday.

And although the payroll tax is regressive, taking more as a percentage of income from those with low incomes than high incomes, that doesn't mean lower income workers will receive most of the benefit.

According to a recent Congressional Budget Office report, the 20 percent of households with middle income pay 9.7 percent of their income in payroll taxes, while those in the top 20 percent pay just 6.7 percent (see figure).

  • However, someone earning the minimum wage would get $53 more in take-home pay; someone earning at least the maximum wage covered by Social Security would get $415.
  • According to CBO, 44 percent of all payroll taxes are paid by those in the top quintile; thus, presumably, they would get 44 percent of the benefits of any payroll tax holiday.
  • This doesn't count the employers' portion of the tax, much of which would go to high income business owners.
In any event, since only about 15 percent of tax rebates is spent, there isn't much stimulus to be had from a temporary tax cut.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 3, 2001.


Browse more articles on Economic Issues