Taxes Drain Almost Half Of Workers' Additional Earnings

NCPA Study Says Cost to Workers Will Increase Without Social Security Reform

DALLAS (June 13, 2002) -- American workers today only get to keep 56 cents out of each additional dollar they earn, on the average. And the share of their income workers get to take home will get even smaller unless reforms are made to Social Security, according to a new study released today by the National Center for Policy Analysis (NCPA) that was written by economists at the Private Enterprise Research Center at Texas A&M University. The FICA payroll tax, which funds Social Security and part of Medicare is already the largest tax most Americans pay. Adding this tax to other taxes on labor income results in a surprisingly high tax rates:

  • The average American family today faces a marginal tax rate of 44 percent, meaning they only get to keep 56 cents out of each additional dollar earned.
  • By 2050, when today's teenagers begin to retire, taxpayers will only get to keep 47 cents of each additional dollar earned.
  • By the time today's newborns retire in 2070, taxpayers will keep only about 40 cents of each additional dollar earned.

"These high tax rates cause considerable economic harm," said Dr. Andrew Rettenmaier, the Executive Associate Director of Texas A&M University's Private Enterprise Research Center, who co-authored the NCPA study. "The hidden cost of the current system is that people are encouraged to work fewer hours and produce fewer goods and services, relative to an efficient tax system." The study measured the cost to society of collecting the payroll tax, over and above the actual revenue the government receives. Among the findings:

  • The economic cost to society in lost productivity and output from the Social Security payroll tax alone is between 11 cents and 18 cents for every dollar of tax revenue collected.
  • In 2001, this loss amounted to between $49 billion and $82 billion, or as much as $804 for every household in America.
  • By the time today's teenagers begin to retire, the nation will be sacrificing as much as 30 cents for every dollar in Social Security taxes collected.

"We can avoid this bleak future," added Rettenmaier, "but only if we are willing to reform Social Security. We need to rely less on taxes collected from others and more on workers' saving to fund their own retirement." The study found that the economic losses of the current system could be reduced by almost a third by 2050, and more than half by 2070, under a reform option proposed by President Bush's bipartisan commission.