PROPOSING TAX INNOVATIONS
January 9, 1996
Former Congressman Jack Kemp's Tax Commission -- a private 14-member group -- will this week unveil its recommendations for a fundamental revision of the U.S. tax code. Along with recommending a form of the flat tax, it is expected to propose full deductibility of payroll taxes for working men and women.
Here is some explanation and background:
- In the early 1960s, workers and employers each contributed 3 percent of workers' earnings to Social Security.
- Today, the employer-employee payroll tax burden has hit a joint 15.3 percent of earnings -- when Medicare is included.
- More than half of all workers now pay more in payroll tax than they do in income taxes.
- Currently, employers officially carry half the payroll-tax burden, which they can deduct from corporate income taxes. Employees, however, carry the other half, which they cannot deduct. As a result:
- A typical middle-income family pays a top income tax rate of 28 percent, plus some 7 percent in payroll taxes, for a top rate of 35.5 percent.
- But economists contend that they also carry the employer's share of the payroll tax, because employers just pay them that much less.
- Thus, those earning under $60,000 are effectively paying a top tax rate of 40 percent or more.
- With payroll tax deductibility and a flat tax of even 22 percent (higher than most rates being suggested), the marginal rate facing that worker would be closer to 32 percent.
Advocates say its time to put more of workers' money back in their pockets.
Source: Amity Shlaes, "Wage Reform: Kemp Tax Team Reward's Labor," Wall Street Journal, January 9, 1996.
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