Increase the Employer and Employee Payroll Tax Rate by 1 Percentage Point

The Social Security payroll tax applies to an individual’s first $184,500 of wages in 2026 (the threshold is inflation-adjusted annually) at a rate of 12.4 percent, split between employees and employers. Though employers are legally responsible for paying their portion of the payroll tax, the long-term burden of both sides of the payroll tax falls on employees in the form of lower wages. Compared to other tax types, the payroll tax is relatively efficient because the entire burden falls on labor, which is less responsive to taxation than capital.

This option increases both the employee and employer Social Security payroll tax from 6.2 percent to 7.2 percent, yielding a combined Social Security payroll tax rate of 14.4 percent on the first $184,500 of wages (in 2026, indexed to inflation annually). Raising payroll tax rates would reduce the incentive to work, thereby reducing economic output and after-tax incomes.

On a conventional basis, this option would decrease the primary deficit by $2,432.4 billion over the budget window. Long-run GDP would fall by 0.5 percent, and long-run GNP by 0.2 percent. On a dynamic basis, the primary deficit would decrease by $1,919.4 billion from 2027 through 2036, $513.0 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 161.4 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 1.1 percent. The top quintile of taxpayers would experience a 0.9 percent decrease, while the bottom quintile would experience a 1.2 percent decrease. On a long-run dynamic basis, taxpayers would see a 1.5 percent decrease on average.