Published in The Enterprise, 4-27-98

Stop Sanctioning Workers and Employers: Ditch the Payroll Tax

by Rocky Anderson

When we speak about excessive and inequitable taxation, most of us complain about income taxes, property taxes, and sales taxes on such things as food. But what is the most oppressive tax, the tax that creates the greatest burdens on the middle class and small employers, the ever-burgeoning tax that significantly reduces wages and salaries while letting investors entirely off the hook?

It’s the payroll tax. Presently, the total payroll tax is 15.3 percent – 12.4 percent Social Security (FICA) tax and 2.9 percent for Medicare. The payroll tax is split evenly between employers and employees – 7.65 percent from wages and salaries; 7.65 percent from employers. Although there is now no cap on Medicare payroll taxes, the Social Security tax, applied only to the first $68,400 of earnings, is tremendously regressive.

Social Security and Medicare are headed for disaster, but seldom do we hear anyone – particularly politicians – talk about real reform of those programs. And almost no politician will dare speak of reducing or eliminating the payroll tax. Yet that is exactly what Congress should do: phase out the payroll tax and fund Medicare and Social Security from the general tax fund.

Our politicians are fond of speaking about the virtues of work and high employment, yet they sanction us severely for working – and for providing jobs. Seventy-five percent of the nation’s federal tax load is placed on the backs of workers and their employers. And the worst part of the work-tax is the payroll tax, which, unlike the income tax, largely comes from working and middle class employees and their employers.

If you’re disgusted with high income taxes, let this fact simmer in your tax-consciousness for a while: The payroll tax rate of 15.3 percent is more than the effective income tax rate paid by 95% of Americans. That’s right; only the wealthiest 5 percent of taxpayers in this country pay a higher percentage in income taxes than workers and their employers pay in payroll taxes. If a family of four has earnings of $40,000 a year, it will pay almost twice as much in payroll taxes as income taxes. And keep in mind that those who live off capital gains and other types of investments – that is, those who do not make a living from working for a wage or salary – pay no payroll taxes.

Payroll taxes should be eliminated for several reasons. First, they are unfair. Why should middle class workers and small employers bear the brunt of our ailing Social Security and Medicare programs, while there is no Social Security or Medicare tax on dividends, interest or profits from the sale of stocks and real estate?

Second, they are “hidden” taxes that we hardly notice and which creep ever upwards without much notice by anyone. Since the Social Security tax was enacted, it has crept up steadily from 2 percent of wages in 1937, to 6 percent in 1960, to the present 12.4 percent.

Third, and perhaps most importantly, the Social Security tax helps provide cover for a massive fraud being perpetrated upon the American people. We are led to believe that we are paying into a program so that money will be there for us when we retire. However, all that is “there” is a bunch of government IOUs, which can only be paid off by taxing us – or our children – more in the future. And, most deceptively, the so-called Social Security Trust Fund – which is no such thing – has been raided for many years in order to conceal the true size of the federal deficit and to justify the transfer of income from working people to the very rich.

As Deep Throat said, “Follow the money.” A worker and her employer pay 12.4 percent of wages in Social Security taxes. Part of the money goes into the “Social Security Trust Fund” as “surplus”. The government grabs the money and spends it. The President crows about how the deficit is lower than it really is, without disclosing that Social Security taxes have been used to pay government bills. Then, with the deficit “reduced,” Congress decides it’s time to once again reduce capital gains, which benefits mostly the wealthy. And, when it comes time to pay back the IOUs to the “Trust Fund,” the government raises the money by taxing us and our children even more.

The first step toward fundamental reform of Social Security and Medicare is to include those programs in the general budget and finance them the same way we fund other government programs. Either raise the individual income tax or, better yet, scrap the income tax entirely and finance our government by a national sales tax so that working and saving are no longer penalized.

Much remains to be done to save our Social Security and Medicare systems – particularly since 76 million Baby Boomers are approaching retirement. The solution, however, should not burden primarily working people and their employers. Neither should the solution perpetuate the fraud that we are all building up some kind of fund for our retirement. We can bring these programs into demographic and economic balance by fairly spreading the burdens and being honest in the process. But we’d better elect people who will do the job – and do it now.

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