NCPA - National Center for Policy Analysis

The Tax Bite on Additional Earnings

June 13, 2002

American workers today only get to keep 56 cents out of each additional dollar they earn, on average - and that will drop unless reforms are made to Social Security, according to a new study by the Private Enterprise Research Center at Texas A&M University released today by the National Center for Policy Analysis (NCPA).

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 surprisingly high tax rates [See Table I]:

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

There is also a substantial cost to society:

  • 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.

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.

Source: Liqun Liu and Andrew Rettenmaier (Private Enterprise Research Center, Texas A&M University), "The Economic Cost of the Social Security Payroll Tax," Study No. 252, National Center for Policy Analysis, June 2002.

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