What is the definition and purpose of the payroll tax? Discuss how a cut in payroll taxes can impact a recession.

What is the definition and purpose of the payroll tax?

Payroll tax is a tax that imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their staff. Payroll taxes generally fall into two categories: deductions from an employee’s wages, and taxes paid by the employer based on the employee’s wages. The first kind are taxes that employers are required to withhold from employees wages, also known as withholding tax, pau-as-you-earn tax (PAYE), or pay-as-you-go tax (PAYG) an employer withholds and pays on behalf of his employees, and it is based on the wage or salary of the employee. Second kind is a tax that is paid from the employer’s own funds and that is directly related to employing a worker. These can consist of fixed charges or be proportionally linked to an employee’s pay.

Since the purpose and uses of those revenues from payroll taxes to fund programs such as social security, health care, unemployment compensation, various insurances and often covering advance payment of income tax. Sometimes local governments collect a small payroll tax to maintain and improve local infrastructure and programs including first responders, road maintenance, and parks and rec programs.

As, due to the cut in payroll tax increases the actual salary of the people or boosts the economy by putting more money into circulation. As a result, it contributes to uplift the economy/ recession. Since it improves the economy (recession period)  in the short-term but depress the economy in the long-term if they lead to increase federal debt. Once a tax cuts are put in place, they are difficult to revoke. Since cut in payroll tax helps to improve the recession for certain period of time but that will not be long lasting, since that will not help to maintain economy for long term.