Summary: In response to the economic effects of the coronavirus, President Trump has proposed a payroll tax holiday that would temporarily eliminate all Social Security and Medicare payroll taxes through December 31st, 2020. We estimate the budgetary, distributional and economic effects if the holiday were run from April 1 through December 31, 2020. Updated on March 17, 2020 to include two scenarios for how the employer side of the tax cut would be distributed: either to the full benefit of business owners and corporate equity holders (“profits rise”) or to the full benefit of workers (“wages rise”).
Table 1. Conventional Revenue Estimate, Fiscal Years 2020-2029
Billions of Dollars, Change from Current-Law Baseline
Scenario
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
Total
Wages rise
-563
-244
0
0
0
0
0
0
0
0
-807
Profits rise
-593
-221
0
0
0
0
0
0
0
0
-814
Table 2. Distribution of Federal Tax Change, Calendar Year 2020
Wages rise
Income group
Average tax change
Share with a tax cut
Percent change in after-tax income
Share of tax change
Share of federal taxes paid
Under current law
Under the proposal
Bottom quintile
-$320
32.9%
10.7%
1.9%
0.1%
-0.6%
Second quintile
-$2,185
88.3%
9.6%
10.1%
2.3%
-0.6%
Middle quintile
-$4,240
91.4%
9.9%
18.8%
10.3%
7.1%
Fourth quintile
-$6,790
86.2%
8.8%
26.0%
19.1%
16.5%
80-90%
-$11,270
92.0%
9.4%
17.7%
14.9%
13.9%
90-95%
-$14,455
94.1%
8.5%
10.7%
10.9%
11.0%
95-99%
-$17,245
94.1%
6.1%
10.3%
16.4%
18.6%
99-99.9%
-$23,065
94.3%
2.8%
3.1%
12.7%
16.3%
Top 0.1%
-$70,175
92.7%
1.0%
1.1%
13.0%
17.5%
Profits rise
Income group
Average tax change
Share with a tax cut
Percent change in after-tax income
Share of tax change
Share of federal taxes paid
Under current law
Under the proposal
Bottom quintile
-$215
34.5%
7.2%
1.2%
0.1%
-0.4%
Second quintile
-$1,420
92.3%
6.2%
6.1%
2.3%
0.7%
Middle quintile
-$2,690
95.1%
6.3%
11.2%
10.3%
9.9%
Fourth quintile
-$4,860
94.2%
6.3%
17.4%
19.1%
19.9%
80-90%
-$8,625
98.3%
7.2%
12.7%
14.9%
15.9%
90-95%
-$12,795
99.1%
7.6%
8.9%
10.9%
11.9%
95-99%
-$23,235
99.4%
8.2%
13.0%
16.4%
17.7%
99-99.9%
-$82,120
99.6%
10.1%
10.2%
12.7%
13.7%
Top 0.1%
-$1,295,115
99.9%
17.9%
18.5%
13.0%
10.7%
Note: “Income” is defined as AGI plus: above-the-line deductions, nontaxable interest income, nontaxable Social Security benefits, nontaxable pensions and annuities, employer-side payroll taxes, and corporate liability. For this short-run analysis, the corporate income tax is assumed to be borne entirely by the owners of corporate equity. Federal taxes included are individual income, payroll, and corporate income taxes.
Table 3. Economic Effects of Proposed Payroll Tax Holiday
Percent Change from Baseline
Year
GDP
Capital stock
Hours worked
Average hourly wage
2030
-0.1%
-0.2%
-0.1%
0.0%
2040
-0.1%
-0.4%
-0.1%
-0.1%
2050
-0.2%
-0.5%
0.0%
-0.2%
Note: Consistent with empirical evidence, the projections above assume that the U.S. economy is 40 percent open and 60 percent closed. Specifically, 40 percent of new government debt is purchased by foreigners.
