Expanding Payroll Tax Cut Would Help Small Businesses, Not Hurt Them

November 29, 2011 at 5:13 pm

Some have argued that a Senate bill to extend and expand the payroll tax cut and pay for it through a surtax on incomes over $1 million would hurt small businesses and thus weaken job growth.

This claim overlooks the benefit of the payroll tax cut not only for working families but for small businesses as well.  It also greatly overstates the impact that the millionaire surtax would have on a relatively tiny number of small businesses.

The bill’s payroll tax cut would not only boost workers’ paychecks by hundreds of dollars or more in 2012 but also cut the taxes of every small business.  Employers would receive a tax holiday on fully half of their 2012 Social Security taxes on the first $5 million in payroll.  If employers create jobs, they would pay no Social Security taxes on the first $50 million in increased taxable payroll.

The millionaire surtax, in contrast, wouldn’t take effect until 2013 and would hit only a tiny fraction of small businesses.  According to a new Treasury Department study, 99 percent of small business owners whose small business income is taxed at the individual rather than corporate rate make less than $1 million; they account for 85 percent of small business income.  The surtax wouldn’t affect these business owners at all.  Individuals affected by the surtax will much more likely be corporate executives, Wall Street bond traders, and corporate lawyers than your neighborhood cleaning store owner.

While people with million-dollar incomes would pay more in taxes once the surtax took effect, the economic effect would likely be small, since they are less likely to cut back appreciably on their spending in response to such changes than are families that live paycheck to paycheck.  In contrast, the economic consequences of allowing the temporary payroll tax holiday to lapse would be substantial:  Goldman Sachs estimates that allowing the current payroll tax holiday to expire as scheduled would shave up to two-thirds of a percentage point from next year’s economic growth; according to economist Mark Zandi, such a failure would reduce employment by around 750,000.

Extending and expanding the payroll tax cut would give the economy a needed boost next year.  But Congress needs to act before the current payroll tax cut expires on January 1st.

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More About Chuck Marr

Chuck Marr

Chuck Marr is the Director of Federal Tax Policy at the Center on Budget and Policy Priorities.

Full bio | Blog Archive | Research archive at CBPP.org

2 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. IO805 #

    Moody’s Analytics estimated in August that letting the tax cut expire would reduce growth by as much as 0.5%. It called extending the cut one of the “most straightforward” ways to “reduce some of the coming fiscal restraint.”
    The Democrats’ bill would extend and expand last year’s tax break. Payroll taxes, cut to 4.2% from 6.2% last year, would be lowered to 3.1% to provide middle class families with up to $1,500 more in their paychecks next year, Democrats said.
    Their measure also would partially extend the break to employers, hoping that might spur hiring.
    The price tag of the bill is about $265 billion, paid for by the 3.25% surtax on annual income above $1 million

  2. 2

    I have to agree with Howard Gleckman over at the Tax Policy Center who in his payroll tax post said, “On its own merits, extending the payroll tax cut may be better than nothing, but it isn’t very good.” http://eng.am/uvIDMJ

    So I understand the rationale behind extending the payroll tax cut, but why should it be expanded?

    How much would the expanded cut improve the economy compared to just extending the current cut?

    And what would effect would expanding the tax cut have on the social security trust fund if it is not funded by the surtax on millionaires?

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