Senate Republicans are reluctant to include a temporary payroll tax cut in the next coronavirus response bill even though the Trump administration is championing it. The arguments against this idea are unpersuasive. A payroll tax cut would work better than other options to help the middle-class and encourage a return to work.
Moderate income households pay much more in payroll taxes than income taxes. Under current law, employers and employees both pay 7.65 percent of wages in Social Security and Medicare taxes. The Social Security tax (6.2 percent each for firms and workers) applies to wages earned below an annual upper limit ($137,700 in 2020). The Medicare portion of the tax (1.45 percent for both employers and employees) applies to all wages, without limit.
The burden of the payroll tax falls almost entirely on workers. Firms pay the employer share of the tax but they pass on as much of the cost as possible to their employees in the form of reduced wages.
To the extent that the supply of labor is sensitive to the compensation offered by firms, a payroll tax cut could increase overall employment, although perhaps modestly. In the current environment, with millions of workers abruptly pushed out of jobs because of strict social distancing policies, a reduction in the payroll tax may entice some of the unemployed to re-engage in the labor market.
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