Integrating the tax burdens of the federal income and payroll taxes on labor income: 7. CONCLUSION

By Geier, Deborah A.
Publication: Virginia Tax Review
Date: Saturday, June 22 2002

자료: Integrating the tax burdens of the federal income and payroll taxes on labor income

VIII. CONCLUSION

The policy of nondeductibility and noncreditability of payroll taxes

under the income tax, though deliberate in 1935, has continued without reexamination as the income tax world around the payroll tax has changed dramatically. Few payroll taxpayers in the 1930s paid income tax, which was a tax paid only by the wealthy minority of the population. Moreover, few thought the income tax would ever be paid by the middle and lower classes.

When the income tax was expanded to reach the middle and lower

classes, however, suddenly the wages of the lower and middle classes were subject to double taxation at the federal level--once under the payroll tax and once under the income tax. For many years, this situation was ameliorated by the fact that both the payroll tax and the income tax rates imposed on the middle and lower classes were relatively low. With the dramatic expansion of the payroll taxes in the last several decades, however, this is no longer true today.

Payroll tax revenue now nearly equals personal income tax revenue,

and this payroll tax burden is borne predominantly by the middle class. The combined employer and employee payroll tax rate is now more than fifteen percent, and nearly two-thirds of households pay more in payroll taxes than they do in income taxes. This is true particularly in low- and middle-class households--those with incomes of less than $100,000 per year. At the same time, the wealthiest households are experiencing significant estate and income tax decreases while also enjoying an ever-growing share of after-tax national wealth. Even before enactment of the 2001 Act, Mitrusi and Poterba concluded that the poor and middle classes experienced a tax increase between 1979 and 1999 because of the increasing take of the payroll taxes, while the wealthy enjoyed a tax decrease. The magnitude of these trends was exacerbated with enactment of the 2001 Act. For reasons of equity, the time has come to begin considering whether the payroll tax burden ought to be integrated with the income tax burden through either a deduction or a credit. I believe that the most conceptually defensible means to achieve integration would be to allow workers a refundable credit for a portion of payroll taxes paid against income tax owed in an amount equal to a reasonable "personal exemption" equivalent. Social Security benefits would be fully includable under the income tax when received in retirement, while medical care received in kind would continue to be excludable.

Having said this, my cynical side thinks it unlikely that any such

proposal could get far in the near future. One reason is that such a plan would be expensive, and there is no more budget surplus to pay for it. For this reason, an alternative to integration might be to repeal the Social Security wage ceiling of $84,900 (just as under the Medicare tax) and slash the marginal rates as low as possible to retain revenue neutrality, while maintaining the payment formula (with the wage ceiling) as it is today. With low marginal rates under both the Social Security and Medicare taxes, the multiple tax burden on the labor income of the poor and middle classes should not be as objectionable as it is today. Once the Social Security and Medicare taxes are seen as true taxes that fund government spending that helps to support the infrastructure of our regulated capitalist economy, and not as equivalents to private pension plans or insurance contributions, then objections to repealing the wage ceiling should be muted. If progressivity in the tax burden is generally justified, then there is no reason why the Social Security tax should be predominantly borne by the middle and lower classes.

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