Thursday, November 29, 2012

The Problem With The Payroll Tax

A commission was formed in the early 1980's, headed up by Alan Greenspan, to make Social Security stronger so that there would be funds available to provide for the baby boomers when they retired (right about now).  The solution was to raise the payroll tax.  The government has been collecting more money from the payroll tax than it pays out in benefits since that time.  That enabled Ronald Reagan to cut taxes, that primarily benefits those in high tax brackets.  The Treasury does not segregate income from the payroll tax from other taxes that it collects.  It "borrows" the surplus and puts an IOU into a Social Security trust fund, and spends the "borrowed" money just as it spends money collected from other taxes.  The problem is that we are getting to the point where the payroll tax will not provide a surplus that government  can use for other purposes.  Even worse, the Treasury will have to pay back the money that it owes to the Social Security trust fund.  That means that other taxes will have to rise, or benefits to future beneficiaries may have to be reduced. 

In a real sense, the payroll tax has been a fiction. It is very regressive tax because it taxes every dollar of wage income up to $110,000. It does not tax income over $110,000, or unearned income from capital gains or dividends.  In other words, it is a tax that takes a much greater share of income from low wage earners  than it does from the wealthy.  It has served the wealthy very well since the payroll tax, which provides about as much income to government as the income tax, is a better alternative for them than a progressive income tax.  Perhaps we would be better off to eliminate the payroll tax and fund all government spending with the more progressive income tax.

1 comment:

  1. In a situation like this, I think it is best for the government to make adjustments from time to time in a way that they will be able to pay their debt and keep it from ballooning. For example, they would spend a year prioritizing paying debts and spend the next one in prioritizing the benefits for older people. In that way, there will be a sense of balance in everything; although sacrifices are always there despite the adjustments.

    Clemencia Summers