As Joe Antos has pointed out, ending the payroll tax and funding Social Security with general revenues, while leaving its current benefit formula in place, would actually discourage work. Instead, it funds Social Security benefits. The payroll tax is not simply a randomly generated toll on worker wages. Economists disagree about how much the payroll tax affects employment, but the Congressional Budget Office and many other experts find that lowering the payroll tax would reduce labor costs and generally increase employment.Īn important caveat should be applied to these conclusions.
It is for this reason that reducing the payroll tax is occasionally suggested whenever elected officials consider how to boost job creation during a recession. The Social Security payroll tax subtracts 12.4 percent from the wage compensation an employer can provide to an employee for doing a job and, thus, is a substantial cost imposed on employment. Factor 3: The Payroll Tax Imposes a Substantial Cost on Employment
For this reason, many employers are continuing to forward these payroll taxes to the federal government, despite the president’s executive order.Īt the same time, President Trump’s executive order directs the secretary of the Treasury to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred.” President Trump has also expressed the hope that the tax forgiveness would be permanent, though White House officials subsequently clarified that this meant that workers would not have to repay the foregone taxes next year, rather than that the payroll tax would be totally eliminated going forward. Unless the law changes, workers will have to make up in 2021 any payroll taxes they don’t pay this year. Instead, the president’s executive order simply defers the mandatory collection of certain payroll taxes, which American workers still owe. The payroll tax rate is set in law, which the president lacks the authority to change. Factor 2: President Trump Lacks the Authority to Cut the Payroll Tax and Is Merely Allowing Its Collection to Be Deferred The current payroll tax rate reflects what government officials thought would provide sufficient funding to Social Security when it was last adjusted several decades ago. The purpose of the payroll tax is straightforward: to fund Social Security so that any benefits it pays are deemed to have been earned by workers via their contributions, in contrast to other federal benefit programs that are financed from the government’s general fund. The Social Security trust funds depend on payroll taxes for most of their income, along with interest that is earned on any revenue that remains unspent (the program also has a much smaller revenue stream from the income taxation of Social Security benefits). The amount of the payroll tax is not arbitrary. Workers also pay a similar payroll tax (2.9 percent in most cases) to support Medicare Hospital Insurance. Ostensibly, 6.2 percentage points of that amount are paid by the worker, and 6.2 are paid by the worker’s employer, but economists agree that all 12.4 points of the tax are taken out of the worker’s compensation and thereby reduce his or her take-home wages. Workers’ earnings (up to an annual cap that is automatically adjusted each year) are subject to a 12.4 percent payroll tax that funds the Social Security program. Background on the Social Security Payroll Tax: Its Purpose and Effects Factor 1: The Purpose of the Payroll Tax Is to Fund Social Security
The purpose of this policy brief is to explain the substantive issues and factors surrounding the debate over President Trump’s actions. This action has been aggressively criticized by President Trump’s political opponents. President Trump signed an executive order in August 2020 allowing American workers’ payroll tax contributions to be deferred until the end of the year.