Claiming that it would increase the pace of the U.S. economic recovery, a group of Senators including Senators Harry Reid (D-NV) and Chuck Schumer (D-NY) on Wednesday called for new stimulus measures to be included as part of the ongoing debt ceiling debate. One of the main proposals discussed was an extended and expanded temporary payroll tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. .
As part of last December’s budget deal, a portion of employees’ Social Security payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. payments are suspended, reducing the rate from 6.2% to 4.2%. This payroll taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. holiday is reducing federal revenue by an estimated $111.7 billion. The senators’ proposal would extend this deduction for another year.
Although it is clear that economic recovery is not complete, the proposal may not succeed in its intentions. Generally, these frequent “temporary” changes to the tax code also increase uncertainty and threaten to create economic distortions within the economy.
If officials really want to encourage economic growth through tax policy changes, they should pursue comprehensive tax reform. Broadening the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. and lowering rates would reduce administrative and compliance costs, discourage tax avoidance, and eliminate unjustifiable distortions.
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