For most employees in the United States there are three different federal taxes taken out of their paychecks by their employers: income tax withholding, Social Security tax, and Medicare tax. Social Security and Medicare taxes are known together as payroll taxes. Unlike the amount withheld for income tax, over which employees have some control, depending on how many allowances they claim on their Employee’s Withholding Allowance Certificate (W-4 form), the amount taken from paychecks for Social Security and Medicare taxes is a fixed percentage.
The Social Security tax rate is currently 12.4 percent (split equally between employer and employee) on the first $132,900 of employee income. The Medicare tax rate is currently 2.9 percent (split equally between employer and employee) on every dollar of employee income. Self-employed persons pay the full 15.3 percent, but receive a deduction toward their income tax equal to 50 percent of the amount of their payroll taxes. “The rich” also pay a 0.9 percent Additional Medicare Tax on income exceeding $200,000 ($250,000 married filing jointly). And for the self-employed, the extra 0.9 percent is not eligible for the 50 percent income tax deduction.
Late last month, Donald Trump proposed an unspecified cut in payroll taxes — until he changed his mind.
The day after a White House official told the New York Post that “as Larry Kudlow said yesterday, more tax cuts for the American people are certainly on the table, but cutting payroll taxes is not something under consideration at this time,” Trump said he was open to new ideas. “Payroll tax is something that we think about, and a lot of people would like to see that, and that very much affects the workers of our country,” he said cryptically during an exchange with reporters at the White House. The president broached the idea as a way to give working Americans more disposable income, which would supposedly lead to more spending, and possibly prevent (or at least postpone until after the next election) a looming economic slowdown — caused in part by Trump’s tariffs and trade war with China. But then a day later Trump said that “we don’t need it” and that he is “not looking at a tax cut now.”
I beg to differ with the president. Americans certainly do need a payroll tax cut.
In fiscal year 2020 (which begins on October 1), the federal government is expected to take about $3.6 trillion out of the hands of Americans. About 57 percent of that will be from income taxes, about 36 percent will be from payroll taxes, and the rest will come from other taxes and fees. (The federal government is expected to spend about $1 trillion more than the $3.6 trillion it will take in, but that is another subject for another time.)
The original Social Security tax rate (1937) was 2 percent (split equally between employer and employee) on the first $3,000 of employee income. By 1954, the rate had doubled, and by 1969, the rate had doubled again. It reached its current level in 1990. The taxable wage base exceeded $10,000 in 1973, $51,000 in 1990, and $100,000 in 2008.
The original Medicare tax rate (1966) was 0.7 percent (split equally between employer and employee). It reached its current level in 1986. Except for the years 1991–1993, when it greatly increased, the taxable wage base for Medicare tax was originally the same as that for Social Security. Beginning in 1994, every dollar of employee income has been subject to Medicare tax.
There is a recent precedent for a payroll tax cut. The Bush tax-cut extension that was enacted in 2010 year included a two-year reduction in the employee’s share of the Social Security tax rate from 6.2 percent to 4.2 percent. The employer’s share remained the same, as did the Medicare tax rate. That was the only time in history when the Social Security tax rate was cut. What is interesting about it is that a Democratic-controlled House and Senate and a Democratic president were responsible for the legislation. Barack Obama even called it “a substantial victory for middle-class families across the country” and described the bill as “a package of tax relief that will protect the middle class, that will grow our economy and will create jobs for the American people.” Two years later, Republicans opposed extending the payroll tax cut and let it expire.
But, it is argued, payroll taxes shouldn’t be cut because they are used to fund Social Security and Medicare. Those programs are already on the verge of insolvency. Their trust funds are being depleted. Cutting the taxes that fund them will just make matters worse.
There are two problems with this line of thinking.
First, Social Security and Medicare are just glorified welfare programs. The Social Security and Medicare trust funds are an accounting fiction. There are no accounts with any American’s name on them to which payroll taxes are deposited. The age to become eligible for benefits can be raised at any time. Benefits can be reduced at any time. There is no connection between the taxes paid and the benefits received. In fact, there is no contractual right to receive any Social Security or Medicare benefits at all.
And second, the programs funded by payroll taxes are illegitimate. Social Security has two parts. The Old-Age and Survivors Insurance (OASI) program provides monthly benefits to retired workers, families of retired workers, and survivors of deceased workers. The Disability Insurance (DI) program provides monthly benefits to disabled workers and families of disabled workers. Medicare is government-funded health care for Americans 65 years old and older and for those who are permanently disabled, or who have end-stage renal disease (kidney failure requiring regular dialysis) or ALS (Lou Gehrig’s disease). Medicare has four parts: Part A (hospital insurance), Part B (medical insurance), Part C (Medicare Advantage plan), and Part D (prescription-drug plan). Even if every penny taken from employee paychecks for Social Security and Medicare actually fully funded the programs, they would still be illegitimate. Since when is it constitutional or the proper role of government to operate a retirement, disability, insurance, savings, pension, or investment program; pay for anyone’s health care; provide a safety net; or keep anyone out of poverty?
Americans certainly do need a payroll tax cut, but not for any reason given by the Trump administration or Republicans in Congress, or conservatives in think tanks. Like Democrats, liberals, progressives, socialists, and other left-wingers, right-wingers are not opposed to taxes on principle. They have no philosophical objection to payroll taxes — or any other taxes. The former groups have no problem using the tax code for their various social-engineering and income-redistribution schemes, while the latter groups usually prefer that taxes collected be spent to fund U.S. military adventures around the world and on the war on drugs.
Not only should payroll taxes be cut, they should be eliminated, along with the programs that they ostensibly fund.
