What Every American Needs to Know about Payroll Taxes

EVERY dollar raised by taxing harmful activities [such as pollution and resource waste] is one dollar less that we must raise by taxing useful ones [working and employing people]. The resulting revenue would enable us to reduce not only the federal deficit, but also the highly regressive payroll tax. And cutting that tax would stimulate hiring and help low-income families meet the burden of new taxes on harmful activities.
— Robert Frank, Cornell University economics professor  


America’s Reliance on Payroll Taxes is Growing:

·  Payroll taxes accounted for 1% of federal revenues in 1934, 32% in 2000, and 36% in 2008 and now rival the Income Tax. 

·  Payroll taxes, for most workers, consume close to 17 percent of salaries, 15.3 percent alone for federal Social Security and Medicare.

Payroll Taxes Hit Low and Moderate-Income Workers the Hardest:

·       Three out of four households pay more in payroll taxes than personal income taxes.

·       The Social Security payroll tax is capped; for 2017, earnings above $127,200 are not taxed.
(This is why billionaire Warren Buffet's secretary pays a higher tax rate than he does. Her entire salary is subject to payroll taxes, his large investment earnings are not -- and they are taxed at a lower rate.)

Payroll Taxes Reduce Employment:

·       Payroll taxes increase the cost of labor. High payroll tax rates: 1) discourage employers from hiring more workers; 2) contribute to the outsourcing of jobs; and 3) prompt some businesses to relocate manufacturing capacity overseas.

·       By reducing the rewards to work, high payroll tax rates also discourage marginal workers from entering the labor force. 

Payroll Tax Relief Could Create Tens of Millions of New Jobs:

·       By taxing pollution or our consumption of energy and natural resources, rather than payrolls, we can create jobs. Payroll tax relief lowers the cost of labor, making it less expensive for businesses to hire and retain workers. 

·       Taxing our consumption of energy and natural resources also encourages employers to make their methods of production less energy-intensive and more labor-intensive. And that means more jobs. 

·       Lowering the cost of labor also makes American workers more competitive with overseas workers—and that reduces the potential “outsourcing” of American jobs.

·       By changing the way we tax ourselves, we can create tens of million new jobs. Daniel Hamermesh, a leading labor market economist (Emeritus at the University of Texas at Austin and now at Royal Holloway University of London), estimates that reducing payroll taxes by just ten percentage points would create 3% more jobs in the short run, and as much as 10% in the long run. Hamermesh says that even more jobs could be created if taxes on natural resources were substituted for the payroll tax. 


“The payroll tax now imposes an unnecessary burden on a [the] economy. In an era of mass unemployment, mediocre wage growth and weak mobility from the bottom of the income ladder, it makes no sense to finance our retirement system with a tax that falls directly on wages and hiring and imposes particular burdens on small business and the working class.”
— Ross Douthat writing in the New York Times