NCPA - National Center for Policy Analysis

Economic Growth And Payroll Taxes

April 9, 1996

Experts are now trying to explain today's sluggish wage growth and other economic conditions. While targets chosen for political motives, such as foreign competition and greedy corporations, get much of the blame, two other items deserve special scrutiny: the sharp increases in Social Security and Medicare spending.

  • In 1955, the median single-income family paid less than 4 percent of its total income in payroll taxes -- including both worker and employer payments -- but today the figure is close to 15 percent.
  • More than two-thirds of workers fork over more in payroll taxes than income taxes, when employer contributions are included.
  • In the past nine years, mandated benefits as a share of total compensation have grown 11 percent.

As a result, workers are not able to save as much, which means a lower investment rate. This, in turn, leads to fewer jobs -- particularly low-wage jobs since these "labor taxes" raise the cost of hiring workers. All these costs distort the economy.

  • One study found the Social Security payroll tax skews the labor market and imposes a loss of about 1 percent of each year's GDP in perpetuity.
  • Further, it has helped depress the national savings rate -- from 12.3 percent in 1950 to only 3.5 percent in 1994.
  • This has led to a loss in national income of more than 5 percent of GDP.

Others point out that senior Americans are spending and consuming more now than in the past, relying on Social Security and Medicare to protect them financially. In 1960, about 16 percent of older Americans' wealth was made up of annuities. Today it's more than half. According to one economist, "We are taking from young savers and giving to old spenders." Unfortunately, the 12.4 percent of income taken from workers isn't invested as wisely in Social Security as it could be in the private sector.

Source: John Merline, "One Way Government Stifles Growth," Investor's Business Daily, April 9, 1996.


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