Tax Policy

Including Payroll Taxes In Tax Reform

The debate over tax reform has largely focused on personal income taxes, rarely involving consideration of payroll taxes that go to Social Security and Medicare. But payroll taxes impose a greater burden on most Americans than income taxes, say analysts.

  • According to the Congressional Budget Office, 73 percent of working families pay more Social Security payroll taxes than personal income taxes.

  • That burden includes the employers' share -- with employers matching the 6.2 percent paid by employees -- but does not include the 2.9 percent Medicare tax.

  • Most tax analysts consider the amount paid by employers actually to be a deduction from the workers' pay.

Sen. John Ashcroft (R-Mo.) has introduced legislation to make a worker's payroll tax deductible from his income tax.

While total federal tax receipts have ranged around 18 percent to 20 percent of gross domestic product (GDP) since World War II, taxes for Social Security and Medicare have soared.

  • Payroll taxes have been raised 13 times in 61 years -- from 2 percent of pay to 12.4 percent.

  • The amount of income subject to the tax has been increased 26 times -- from $3,000 to $68,400.

  • Meanwhile, Social Security and Medicare payroll tax receipts have jumped from 0.6 percent of GDP at the end of World War II to 6.4 percent currently.

GOP pollster Kellyanne Fitzpatrick says voters think they are being sucked in by the "big black hole called the federal government." She points out that the so-called "Social Security trust fund" is a misnomer -- "because it is not built on trust and contains no money to enable it to be called a fund."

Source: John Berlau, "Will Payroll Tax Ever Be Cut?" Investor's Business Daily, May 19, 1998.

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