Payroll tax holiday would cost more than $800 billion, leave out low-income households
PHILADELPHIA, March 12, 2020 — In response to the economic effects of the coronavirus (COVID-19), the Trump administration has called for a temporary payroll tax holiday that would eliminate all Social Security and Medicare payroll taxes.
Penn Wharton Budget Model (PWBM) has modeled the budgetary, economic, and distributional effects of this proposal, estimating that:
- The payroll tax holiday would cost the federal government $807 billion if the holiday were run from April 1 through December 31, 2020.
- Households in the bottom 20 percent of the income distribution—those households with the highest willingness to spend their tax savings—would receive about 2 percent of the total tax cut and only a third of these households would see any tax benefit due to their low levels of taxable income, limiting the policy’s stimulus potential.
- The payroll tax holiday would have little net impact on the short-run economy, but the additional federal deficits resulting from the holiday would crowd out productive investment and slow the long-run economy by 0.1 percent in 2030 and 0.2 percent in 2050.
For more information, see the full PWBM payroll tax holiday analysis.
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About the Penn Wharton Budget Model
PWBM is a nonpartisan, independent applied research organization housed at the Wharton School of the University of Pennsylvania. PWBM works directly with policymakers and staff, serving as an honest broker by providing accurate, accessible, and transparent economic analysis of the fiscal and economic impact of public policy without advocacy. PWBM’s estimates are regularly referenced by policymakers and top news outlets. For more information, visit https://budgetmodel.wharton.upenn.edu/
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