Policymakers are discussing several economic stimulus ideas in response to the coronavirus outbreak, including reports that yesterday President Trump proposed suspending the payroll tax through the November election or the end of the year. Some press stories were also reporting shorter periods of time, such as 90 days. Such a holiday could cost up to $840 billion, per our rough estimates.

We had previously estimated the costs for reducing the Social Security payroll tax rate – between $55 billion and $75 billion per point reduction per year depending on whether the cut is for the employee or employer.

Here, we update our estimates to include completely suspending payroll taxes (including Medicare taxes) and doing only a partial year suspension. Social Security payroll tax revenues are not collected evenly over the year; less is collected in the later months of the year because high-income workers do not owe tax after they have earned above the Social Security taxable maximum ($137,700 in 2020).

To suspend the payroll tax for a full year would cost roughly $1.1 trillion, which is lower than the $1.3 trillion in annual payroll tax revenue because a payroll tax cut on the employer side generally translates to higher wages for employees (and therefore higher income taxes).

By our estimates, suspending payroll taxes for three months would cost $300 billion, suspending them through the end of October would cost $660 billion, and suspending them for the rest of the year would cost $840 billion.

Proposal (cost in billions) 3 Months

(Apr-Jun) Until the Election

(Apr-Oct) The Rest of 2020

(Apr-Dec) Suspend all payroll taxes – Social Security and Medicare $300 $660 $840 Suspend Social Security taxes $240 $515 $650 Suspend employer-side Social Security taxes $100 $215 $275 Suspend employee-side Social Security taxes $130 $280 $350 Suspend Medicare taxes $65 $145 $190 Suspend Medicare employer-side tax $25 $60 $75 Suspend Medicare employee-side tax including high-income surtax $35 $85 $110

Source: CRFB estimates based on Congressional Budget Office, Department of Treasury data.

These are rough estimates. We make a simplifying assumption that the cut in the employer-side payroll tax is passed along to workers, either in the form of higher wages or an averted wage cut, which results in a corresponding increase in individual income taxes. If that assumption does not hold and companies do not pass along tax savings to workers, there would be a different revenue increase from decreased business expenses (and increased profits), but we did not include that effect in our quick estimates here.

If lawmakers did implement a payroll tax holiday, they would need to decide if the revenues lost from the Social Security and Medicare trust funds would be offset with a general revenue transfer (as they were in 2011 and 2012).

In a statement yesterday, Committee for a Responsible Federal Budget president Maya MacGuineas called for any stimulus to be targeted to help the economy and citizens, and offset over a reasonable period of time after the economy has recovered: