Social Security is financed by payroll taxes, which are paid by covered workers and their employers. In the absence of a payroll tax reduction, employees and employers would each pay 6.2% of covered earnings, up to an annual limit, whereas self-employed individuals would pay 12.4% of net self-employment income, up to an annual limit. In December 2010, Congress temporarily reduced the employee and self-employed shares by two percentage points (to 4.2% for employees and 10.4% for the self-employed), with the Social Security trust funds "made whole" by a transfer of general revenue. The temporary reduction was scheduled to expire at the end of 2011, but was extended for two months as part of the Temporary Payroll Tax Cut Continuation Act of 2011 ( P.L. 112-78 ). The temporary payroll tax rate reduction was extended through the end of 2012 in the Middle Class Tax Relief and Job Creation Act of 2012 ( P.L. 112-96 ) and subsequently allowed to expire at the end of 2012. As part of the agreement on the Temporary Payroll Tax Cut Continuation Act of 2011, a conference committee was appointed to consider a full-year extension of the payroll tax reduction. In addition to an extension of the payroll tax rate reduction, the conferees also considered a further extension of unemployment benefits and adjusting payments to doctors under Medicare. The conference committee agreed to extend the payroll tax rate reduction, emergency unemployment compensation, and physician payments under Medicare. The final legislation, however, did not fully pay for (or offset) these extensions. Whether to provide a full-year extension was then debated among policymakers. Concerns included those related to the potential of the temporary reduction to endanger the Social Security trust funds, signaling a departure from the self-finance structure of Social Security, while increasing the federal deficit. Supporters of an extension emphasized the potential of an extension to stimulate the economy and the general revenue "repay" as a way to counter concerns about endangering the Social Security trust funds. However, the use of offsets to reduce the budgetary cost of repaying the Social Security trust funds would reduce the stimulative effect, though the choice of offsets can influence the magnitude of the reduction. This report briefly discusses economic stimulus considerations related to temporary payroll tax reductions and efforts to offset the budgetary cost of an extension. For a discussion of Social Security policy considerations concerning a temporary payroll tax reduction, see CRS Report R41648, Social Security: Temporary Payroll Tax Reduction , by [author name scrubbed]. Short-term fiscal stimulus measures aim to boost economic activity primarily through increases in the demand for goods and services. The goal of these measures is to break a cycle of decreasing output leading to decreasing employment, resulting in lower consumption and leading to further decreases in output. Without stimulative policies the economy would eventually stabilize and recover, but recovery would take longer and the overall disruption to the economy would be greater. The Congressional Budget Office (CBO), in testimony before Congress, has identified three key criteria for assessing proposals to stimulate the economy. The criteria are timing, cost-effectiveness, and consistency with long-term fiscal objectives. The following sections evaluate the payroll tax rate reduction using these criteria. Effective short-term stimulus should happen during the period of economic weakness. In addition, since recessions are historically short lived, effective stimulus should normally also be short lived. An extension of the reduction in payroll taxes could be implemented quickly and be designed to expire as the economy strengthens. The resulting increase in household income would be experienced quickly, as well. A modification of the reduction in payroll taxes, through either a greater reduction or an expansion to employer contributions, could be similarly designed. Effective short-term stimulus maximizes the increase in output and employment per dollar of budgetary cost. The effectiveness of a policy aimed at households would then depend upon the fraction of additional income spent (as opposed to saved) on goods and services relative to the lost federal revenue. Provisions targeted at low-income individuals or the unemployed should be more cost-effective than broad tax rate reductions, as those facing financial constraints are more likely to fully spend any additional disposable income. In addition, theory suggests small recurring increases in income may be more likely to be spent than a similarly sized (in total) lump sum payment, but the empirical evidence to support this is weak. An extension of the reduction in payroll taxes would not be targeted to those facing the greatest financial constraints, but the increase in disposable income would take the form of a small recurring increase. CBO estimated that a temporary reduction of payroll taxes would raise output cumulatively in the next two years by $0.10 to $0.90 per dollar of total budgetary cost and would increase employment by between one and nine jobs per million dollars of budgetary cost. These estimates assume that the majority of the increase in disposable income would be saved or used to pay down debt rather than spent on goods and services. Compared with other household tax reductions, an extension of the reduction in payroll taxes may be a cost-effective stimulus—though well-targeted direct spending may be still more cost-effective. According to CBO estimates, the short-term stimulative effect of an extension of the reduction in payroll taxes would be greater than the stimulative effects from extending the Bush Tax Cuts, on par with a one-year AMT patch, and less than an increase in refundable tax credits. Expanding the reduction in payroll taxes to include employer contributions—as proposed in S. 1660 and S. 1917 —would be expected to provide a slightly greater degree of stimulus per unit of budgetary cost than an employee-side reduction, according to CBO. The policy could encourage hiring by temporarily reducing the cost of labor. However, other evidence suggests that subsidies provided on the employer side, whether to subsidize hiring or investment, may be relatively ineffective, because employers are unlikely to hire in the absence of increased demand. The cost-effectiveness of this policy would ultimately depend on firms' responses to the incentive. Effective short-term stimulus should not hinder long-term fiscal sustainability. An extension of the reduction in payroll taxes, by itself, adds to short-term budget deficits. The two-month reduction was estimated to increase the deficit by $20.8 billion. , Extending the two percentage point payroll tax reduction through the end of 2012 is estimated to cost $93.2 billion. By themselves, these proposals would be at odds with the long-term goal of deficit reduction and may signal to some a lack of resolve to reduce deficits to investors. To address long-term fiscal objectives, some proposals to extend or expand the temporary reduction in payroll taxes include one or more offsets to reduce or eliminate the net budgetary cost of the proposals. These offsets are, by definition, contractionary as they either cut spending or raise taxes. As enacted, the extension of the payroll tax rate reduction was not offset. Dozens of other temporary tax provisions expired at the end of 2011. Whether further extension of other expiring tax provisions should be included in a payroll tax rate was an issue of debate. Ultimately, no other expiring or expired tax provisions were extended as part of the legislation extending the payroll tax rate reduction through the end of 2012. Many of these provisions were extended through the end of 2013 by the American Taxpayer Relief Act of 2012 ( P.L. 112-240 ). Expired tax provisions lead to uncertainty for businesses and individual taxpayers. Furthermore, the potential for tax incentives to influence behavior, often the goal of tax policy, is diminished when expired tax incentives are reinstated retroactively. One challenge posed by the potential inclusion of tax extenders in a payroll tax rate reduction extension is the cost of extending these expired provisions. The Joint Committee on Taxation has estimated that extending these other expiring provisions for one year, through December 31, 2012, would cost $36.9 billion over the 2012 through 2021 budget window. This figure does not include the cost of extending the payroll tax rate cut. This figure also does not include the cost of extending first-year bonus depreciation, which would cost an estimated $21.1 billion over the 2012 through 2021 budget window, or the cost of adjusting the Alternative Minimum Tax (AMT) exemption amount for inflation, which is estimated to cost $119.6 billion over the 10-year budget window. Extending the two percentage point payroll tax reduction through the end of 2012 cost an estimated $93.2 billion. In considering a further extension of the payroll tax reduction, many proposals include some form of budgetary offset. The use of offsets is not, however, universal, as the Temporary Payroll Tax Cut Continuation Act of 2012 ( H.R. 4013 ), introduced on February 13, 2012, did not contain any offsets. Ultimately, costs associated with the extension of the payroll tax rate reduction as enacted in the Middle Class Tax Relief and Job Creation Act of 2012 ( P.L. 112-96 ) were not offset. Offsets that reduce spending, or increase revenues, are contractionary. While offsets address the issue of long-term fiscal sustainability, depending on design, they can diminish the short-term stimulative effects of the tax cut. Having offsets occur after the period of economic weakness has passed could limit short-term contractionary effects while simultaneously promoting long-term fiscal sustainability. In addition to the aggregate economic impacts of the offset, there are distributional effects. The percentage increase in after-tax income and the percentage decrease in average federal tax liability is greater for low- and middle-income taxpayers, as compared to the highest-income taxpayers (see Table 1 ). Offsets that reduce income or benefits to low- and middle-income earners, or offsets that otherwise increase taxes, could diminish the potential benefit of the payroll tax rate reduction for affected groups. One option for offsetting the cost of extending the reduced payroll tax rate is to raise additional revenues.