Just How Big is the Payroll Tax Cut?

By :: February 20th, 2012

The 2-percentage-point payroll tax cut extended by Congress in December and again last week will save workers a total of $114 billion this year, according to the Joint Committee on Taxation. Spread over nearly 160 million workers, that’s an average tax cut of $714. Yet the typical news report says “the average worker earning $50,000 [will] take home an extra $1,000.”

That’s a big difference. What’s going on?

The calculation implicit in the news report is simple arithmetic—2 percent of $50,000 is $1,000. But the average worker earns much less—just under $40,000 in 2010, according to the Social Security Administration. That suggests that the average tax saving would be about $800, still more than $714.

The remaining difference results from the Social Security tax cap--$110,100 this year. Since incomes over the cap go into the overall wage average, the average wage subject to the Social Security tax is less than the average for all pay, roughly 10 percent less.

But TPC estimates that the average tax reduction will total $921, well above the average worker’s savings. That’s because TPC looks at tax units—individuals or couples who file tax returns (or would if their incomes were high enough). And TPC leaves out dependents and hence misses the tax savings for many younger workers. Tax units are similar to both families and households but not the same as either.

So here’s the bottom line (or lines):

  1. Nearly 160 million workers will take home an average of $714 more during 2012.
  2. About 122 million tax units will save an average of $924 in payroll taxes.

Only above-average workers will get the $1,000 repeatedly promised in the media.

6Comments

  1. Michael Bindner  ::  6:13 pm on February 20th, 2012:

    Many will get much less. The less you make, the more a minimum wage increase would have made more sense. The more you make, the more likely the cut does not matter.

  2. rjs  ::  6:45 pm on February 20th, 2012:

    it’s pretty easy; those making $500 per week will see $10 more per week, while those making $2000 per week will see $40 more per check…

    can we call that progressive?

  3. Abir Mandal  ::  10:41 pm on February 20th, 2012:

    rjs: Except, the people making more money already pay more in taxes. You act like it is the government’s money to begin with, a terrible fallacy. This tax cut just implies the government is stealing less.

  4. Michael Bindner  ::  10:49 pm on February 21st, 2012:

    Techically, in this case, it is. Workers are getting credited for future benefits based on the old system, with the government adding to the trust fund to cover the difference. Eventually, the children of higher income taxpayers will either have to lend the government money or pay higher taxes to make good on these obligations.

  5. Old Click » Why the Senate’s ‘Middle Class Tax Cut Act’ Is No Way Out of the Fiscal Cliff  ::  9:31 am on December 14th, 2012:

    […] funded from many paychecks if a Congress adopts final summer’s Senate bill. On average, this will cost a workman about $700 subsequent […]

  6. A CALCULATOR  ::  1:10 pm on December 4th, 2013:

    Agreed this is definitely a big edge for Thesis.