Payroll Tax Holiday

December 18, 2012

With the winter holidays right around the corner, and the narrative surrounding the U.S. economy being cautious at best, both the public and private agents are debating the best balance to grow the economy. To attain this end, the dialogue, once more, returns to taxes, specifically, the payroll tax, says Lewis Warne, a research associate with the National Center for Policy Analysis.

The payroll tax cut has now been extended twice and is set to last twice as long.

  • In December 2011, Congress extend the payroll tax holiday for two months to prevent a tax increase during the winter recess.
  • In February 2012 the holiday was extended through the end of the year.

The payroll tax cut has had a negative effect on the annual operations of Social Security.  Since its inception it has:

  • Reduced Social Security payroll revenues by 16 percent, and;
  • Decreased revenue by $103 billion in 2011 and an estimated $112 billion in 2012.

The Congressional Budget Office estimates that extending the payroll tax cut and emergency unemployment benefits through 2013 will raise gross domestic product 0.7 percent higher in 2013, and lower unemployment 0.8 percent, compared to a scenario where they expire.

  • The holiday stimulates the economy is the $100+ billion per year tax cut unaccompanied by any reduction in spending.
  • In reality, the holiday was financed by debt, to be paid for by future generations, and is accumulating interest payments now.
  • The resulting increase in long-term debt could potentially raise interest rates, crowd out private investment and make it harder to pay back the debt in the future by reducing the income (gross domestic product) from which the debt will have to be paid.

On balance, while a payroll tax holiday could provide temporary stimulus during an economic slump, it further erodes the relationship between Social Security's revenue, individual earnings and benefit payments while increasing debt. Instead of simply raising rates again this opportunity should be taken to reform Social Security.

Source:  Lewis Warne, "The Payroll Tax Holiday" National Center for Policy Analysis, December 18, 2012.

 

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