NCPA - National Center for Policy Analysis

Payroll Tax Cut Would Encourage Youthful Employment

February 5, 1999

Most economists agree that the 12.4 percent Social Security payroll tax reduces work incentives, particularly for younger, lower paid workers. A recent Brookings Institution study concludes that a payroll tax exemption for the first $5,000 earned by younger workers might have a significant impact on their employment.

  • Unemployment currently stands at 16 percent among those 16 to 19 years of age, in contrast to 4.6 percent among the population as a whole.
  • Average income was $9,150 among 15 to 24 year-olds, according to the 1996 Current Population Survey.
  • Exempting the first $5,000 of earnings from Social Security taxes for workers aged 25 and under would reduce tax revenue by $12.4 billion, according to the Brookings study.
  • And since 17 million, or 53 percent, of the 33 million people between the ages of 17 and 25 earn $5,000 a year or less, a majority would have stronger work incentives.

The Brookings study notes that those earning above $5,000 would face a marginal tax rate -- taxes on the next dollar earned -- of 12.4 percent, and thus would be discouraged from working more hours.

It suggests young workers are more likely to respond to economic incentives than others because many more of them are on the margin of getting a job -- say as a secondary source of household income. One study found that when economic conditions improve enough to cause a 1 percent increase in the proportion of men age 26 to 61 who work, the proportion of 16- to 19-year-olds employed increases approximately 4 percent.

Source: Michael Kremer, "Restructuring Social Security Taxes," Policy Brief No. 40, December 1998, Brookings Institution, 1775 Massachusetts Avenue, N.W., Washington, D.C. 20036, (202) 797- 6000.


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