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. If this proposed payroll tax is handled similarly, the effect would be still larger budget deficits.President Trump signed an executive order in August 2020 allowing American workers’ payroll tax contributions to be deferred until the end of the year. When the payroll tax was last cut in 2010 under the Obama administration, Congress directed that the lost tax revenue was restored to the Social Security and Medicare trust funds by using general income tax revenues. Cutting this tax, therefore, makes the financial condition of those trust funds more precarious. So, would Congress lower the payroll tax only on the first $132,900?Ī related issue is the impact on the trust funds for Social Security and Medicare, which derive most of their revenue from the payroll tax. For higher earners, the payroll tax for Social Security stops at wages above $132,900, but there is no cap for Medicare. That reduction still can be significant to lower-income workers, but the boost to their take-home pay is then spread out over the whole year’s paychecks.Ī payroll tax tends to benefit lower- and middle-income workers most directly. What happened in the past is the tax was reduced by 2 percentage points, from 6.2% to 4.2%. On the other hand, no one is talking about removing the entire 6.2% payroll tax. Even part-time workers pay FICA, which goes to fund Social Security and Medicare. That’s because the payroll tax begins with the first dollar of earnings, unlike the income tax, which has a significant standard deduction. In fact, nearly three-quarters of working Americans pay more in payroll taxes than they pay in federal income taxes. Nevertheless, the payroll tax, otherwise known as the Federal Insurance Contributions Act, affects almost all working Americans. As a result, any impact on affected taxpayers would probably not show until after the November 2020 presidential election. Instead, he must work through the legislative process and if tax legislation is being considered, the new majority in the House of Representatives may want to revisit the 2017 Tax Act, so getting something done may take a while.
Unlike tariffs, a president cannot unilaterally cut payroll taxes through executive action.
When would any potential changes show up? In any case, it doesn’t look like Congress would enact anything the president proposes. from tipping over into a recession, the bigger question is, why wasn’t this included in the Tax Cuts and Jobs Act of 2017? This proposal is a tacit admission that the 2017 version of tax reform didn’t do much for working people. Politicians always want to be seen as doing something, and cutting the payroll tax could represent the middle-class tax cut that the president campaigned on and then largely forgot about in 2017.īut to the extent that the president thinks this is necessary to stimulate the economy and prevent the U.S. Is the idea of cutting payroll taxes sound policy or more of a last-gasp attempt to stave off a recession? In an interview with News Bureau business and law editor Phil Ciciora, he discusses the implications of cutting the payroll tax. Kaplan, the Guy Raymond Jones Chair in Law at Illinois, is an internationally recognized expert on U.S. Editor’s note: President Trump recently has floated – and then rejected – a number of ideas to jumpstart a stalling economy.
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