Committee for a Responsible Federal Budget

How Much Does a Payroll Tax Holiday Cost?

Mar 3, 2020 | Taxes

President Trump tweeted support for a one-year payroll tax cut Monday evening, saying:

We estimate such a payroll tax cut could cost between $55 billion and $75 billion per percent rate cut. Below is our analysis repeated from August 2019, when White House officials reportedly discussed a temporary payroll tax holiday as stimulus to address an economic slowdown.

The cost of such a payroll tax cut would depend on its size, duration, and design. Based on estimates from the Congressional Budget Office (CBO) and the Joint Committee on Taxation, we estimate a temporary cut in the employee’s Social Security payroll tax rate would cost $70 billion to $75 billion per percent cut each year in lost revenue. 

A cut in the employer Social Security payroll tax rate would cost $55 billion to $60 billion per percent cut each year; the cost would be lower because the employer side cut would likely translate into higher taxable wages.

In 2011 and 2012, policymakers cut the employee-side Social Security payroll tax by 2 percentage points for two years. Enacting the same policy for 2020 and 2021 would cost nearly $300 billion before interest.

Based on a CBO analysis from 2010 (when unemployment was much higher), such a cut would boost economic output by roughly $90 billion to $270 billion over five years. If policymakers offset the cost over time, they could prevent the policy from modestly reducing the size of the economy over the long term and could even increase long-term output.

Lawmakers would need to decide whether the lost revenue would mean less money for the Treasury or less revenue into the payroll-tax-funded Social Security and Medicare trust funds.