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What Is A Payroll Tax Holiday — And Why Are So Many People Worried About It?

President Donald Trump signed a series of executive orders over the weekend intended to expand coronavirus economic relief to Americans that have been hit hard during the COVID-19 pandemic.

Among the orders was a controversial (see: confusing) provision for a payroll tax holiday for earners making under $100,000 a year. Since Trump first touted the idea of a payroll tax cut in March when the pandemic took hold in the United States, many Americans expressed uncertainty about what exactly it would mean for their take-home pay.

In its most basic terms a payroll tax is a percentage of an individual’s earnings withheld by its employer and paid to the government; the employer also matches the employee’s contribution. (Self-employed individuals pay the government self-employment taxes.) Revenues from payroll taxes are used to fund certain programs such as Social Security and Medicare.

The president had been aggressively pushing Congress to temporarily eliminate payroll taxes for five months, drawing the ire of most of Congress as well as many economists who view the move as an ineffective (if not, problematic) way to stimulate the economy as it crumbles under the weight of the global health crisis.

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Detractors argue a payroll tax cut won’t provide financial help for unemployed workers who need the money most. On Thursday, the Labor Department revealed that more than 1.18 million workers filed jobless claims in the week ended Aug. 1. Meanwhile, data also showed that continuing claims — which paints a broader picture of joblessness in the country and lags jobless data by one week — were 16.11 million.

All told, more than 50 million Americans became newly unemployed since March, and about 30 million remain jobless today.

Critics of a payroll tax holiday also argue it would worsen existing financing problems for Social Security, Medicare, and program beneficiaries — many of whom are elderly and in the COVID-19 high-risk category.

“Today’s retirees — more than 61.2 million people — depend on Social Security and Medicare payroll tax revenues for their Social Security and Medicare benefits,” said Mary Johnson, a Social Security and Medicare policy analyst in June. “Their number one concern is that down the line, benefits will be permanently cut to pay for these ‘temporary’ tax cuts.”

At the same time, Johnson noted, social security payroll taxes have taken a significant hit with tens of millions of Americans out of work and claims for social security growing faster than anticipated.

In 2011 and 2012 — as the U.S. sought to recover from the 2009 financial crisis — policymakers cut the employee-side social security payroll tax by 2 percentage points. At the time, instead of paying 6.2% for social security taxes, employee contributions were 4.2%.

That tax holiday, according to the Congressional Research Service, reduced federal tax revenue by roughly $217 billion. At the same time, for a family with wages or salaries of $50,000 per year, about the median household income, the payroll tax cut equaled $1,000 in 2011, according to estimates from the U.S. Department of Treasury.

Enacting the same policy for 2020 and 2021 would cost nearly $300 billion before interest, according to The Committee for a Responsible Federal Budget.

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