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Letter to the Honorable Robert P. Casey Jr. 1 (February 2010)

handle is hein.congrec/cbo9590 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director U.S. Congress Washington, DC 20515 February 3, 2010 Honorable Robert P. Casey Jr. United States Senate Washington, DC 20510 Dear Senator: This letter responds to questions you posed about policy options to increase employment by reducing employers' payroll taxes for firms that increase their payroll. Last month, the Congressional Budget Office (CBO) released a report that addressed such options, as well as other possible approaches to achieving that goal. This letter reviews the analysis in that report and discusses how key design elements of such a policy would affect the resulting gains in employment. CBO's Assessment of a Policy Option to Reduce Employers' Payroll Taxes for Firms that Increase Their Payroll Social Security (which consists of Old-Age, Survivors, and Disability Insurance) is financed by payroll taxes. Under current law, both employers and employees pay Social Security taxes equal to 6.2 percent of an employee's annual earnings, up to a maximum amount (currently $106,800) that is adjusted each year for overall growth in wages. In its January 2010 report Policies for Increasing Economic Growth and Employment in 2010 and 2011, CBO analyzed the effects of giving employers a one-year, nonrefundable credit against their payroll tax liability for increasing their payrolls in 2010 from their 2009 levels. In CBO's analysis, the effect of that policy (and others) on employment was measured as the cumulative effect on years of full-time-equivalent employment for each dollar of a policy's total budgetary cost. (A year of full-time-equivalent employment is 40 hours of employment per week for one year.) By focusing on full-time equivalents, the calculations included increases in hours among part- time workers, and possibly increases in overtime hours among full-time workers, as well as the hours worked by new hires. To account for uncertainty, the analysis included both a low estimate and a high estimate for the effect of each policy. ' The estimated budgetary cost of that policy reflected both the reduction in payroll taxes and the increase in income tax revenues resulting directly from that reduction in payroll taxes. www.cbo.gov

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