Revenues
Impose a New Payroll Tax
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
Billions of dollars | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2025– | 2025– | |
Decrease (-) in the deficit | |||||||||||||
Impose a payroll tax of 1 percent on earnings | -56.7 | -118.2 | -122.8 | -127.2 | -131.1 | -135.3 | -140.1 | -145.0 | -150.0 | -155.0 | -556.0 | -1,281.5 | |
Impose a payroll tax of 2 percent on earnings | -112.4 | -234.5 | -243.6 | -251.2 | -259.2 | -268.4 | -278.0 | -287.7 | -297.5 | -307.4 | -1,100.9 | -2,540.0 | |
Data source: Staff of the Joint Committee on Taxation.
This option would take effect in January 2025.
Payroll taxes are levied on the earnings (primarily wages and salaries) of people who work for an employer and on the net earnings of people who are self-employed. Unlike the individual income tax, those taxes have few, if any, adjustments and are not applied to other sources of income, such as interest, dividends, or capital gains.
Payroll taxes are used to finance social insurance programs, including Social Security and Medicare. Only earnings up to a statutory maximum are subject to Social Security taxes. (That maximum amount is $168,600 in calendar year 2024.) Social Security benefits likewise accrue only for earnings up to the statutory maximum. The Medicare payroll tax is levied on all earnings, and no taxable maximum applies.
This option consists of two alternatives. The first would impose a new payroll tax of 1 percent on all earnings, and the second would impose a new payroll tax of 2 percent. The new tax would be paid entirely by employees. Self-employed individuals would face the same tax rates as those who work for an employer. The proceeds of the new tax would be part of general revenues and would not be tied to the financing of a specific social insurance program. This option would not make any changes to existing payroll taxes.