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Friday, December 2, 2011

The Temporary Payroll Tax Reduction: A Brief Description and Economic Analysis

Donald J. Marples
Section Research Manager

Social Security is financed by payroll taxes, which are paid by covered workers and their employers.1 In the absence of a payroll tax reduction, employees and employers would each pay 6.2% of covered earnings, up to an annual limit, whereas self-employed individuals would pay 12.4% of net self-employment income, up to an annual limit.2

In December 2010, Congress temporarily reduced the employee and self-employed shares by 2 percentage points (to 4.2% for employees and 10.4% for the self-employed), with the Social Security trust funds “made whole” by a transfer of general revenue.3 The temporary reduction is scheduled to expire at the end of 2011.

Several proposals are pending before Congress to extend and modify the temporary reduction in payroll taxes. A proposal would extend the temporary extension through 2012 (The Economic Growth and Reducing Unemployment Act, H.R. 3060), whereas other proposals would increase the reduction to 3.1 percentage points and broaden the reduction to include the employer share (The American Jobs Act, S. 1660; and The Middle Class Tax Cut Act, S. 1917).

Proposals to extend the temporary reduction in Social Security payroll taxes have prompted debate among policymakers. Some are concerned about the potential of the temporary reduction to endanger the Social Security trust funds, signal a departure from the self-finance structure of Social Security, and increase the federal deficit. Supporters of an extension have emphasized the potential of an extension to stimulate the economy and the general revenue “repay” as a way to counter concerns about endangering the Social Security trust funds.

This report briefly discusses economic stimulus considerations related to temporary payroll tax reductions. For a discussion of Social Security policy considerations concerning a temporary payroll tax reduction, see CRS Report R41648, Social Security: Temporary Payroll Tax Reduction in 2011, by Dawn Nuschler.

Date of Report: November 28, 2011
Number of Pages: 5
Order Number: R42103
Price: $19.95

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