NCPA - National Center for Policy Analysis

Payroll Tax Holiday Would Be Poor Policy

December 27, 2002

As a means of stimulating the economy, a short-term payroll tax holiday is a poor option. Tax-policy analysts say temporarily suspending payroll taxes would do more harm than good.

The payroll tax, which is currently set at 15.3 percent -- 12.4 percent on the first $89,000 of wages for Social Security and 2.9 percent on all wages for Medicare -- now tops out at $12,990, and it is expected to keep growing if Medicare and Social Security are not reformed.

A payroll tax holiday is out of favor among some analysts for several reasons.

  • Experience has shown that people tend to bank tax cuts or pay off bills if the cuts are only temporary -- spending the extra money only when they are assured the cuts are permanent.
  • So temporary relief from some payroll taxes would not result in increased consumer spending and the resulting economic stimulus which is the reason for the cuts to begin with.
  • Under a plan from the Business Roundtable, exempting the first $10,000 in earnings from the tax would cost the government about $130 billion and further imperil the troubled Social Security system.
  • So while cutting taxes is nearly always a laudable goal, it should not be done in this case under the guise of economic stimulation.

It would be far more preferable to permanently reduce each worker's payroll tax contribution by 2 to 4 percent -- with the money flowing into a personal retirement account that would earn a market rate of return over the worker's life and provide a portion of their benefit after they retire.

That way, Social Security would continue to provide a dependable benefit to future generations.

Source: Pete du Pont (National Center for Policy Analysis), "Payroll Tax Holiday Mirage," Washington Times, December 27, 2002.


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