Complaints about payrolls taxes have been heard from their inception. Payroll taxes are taxes imposed by the federal government, imposed on wages that are paid, which are collected and paid by employers. Payroll taxes for the federal government include both Social Security contributions and Medicare contributions. Both employees and employers provide funds for these contributions. Some presidential candidates for 2016 are proposing the elimination of payroll taxes, shifting them to other types of tax. A look at the details of these proposals show whether theses plans can be a viable method to reduce taxes for employees and relieve employers of the tax burden.
Understanding the Payroll Tax
Americans who work for a company or for themselves make contributions to payroll tax. This money is listed under the FICA designation on their paycheck stubs or on the W-2 form they receive at the end of each year. Currently, 6.2 percent of employee wages go to the Social Security fund that provides income for the elderly and others who are eligible for benefits under the program. Another 6.2 percent is paid on these wages by the employer. The other component of the FICA amount is the Medicare contribution, which is currently 1.45 percent of employee wages. Again, the employer pays another 1.45 percent of the wages to the Medicare fund. These contributions added up to $1.07 trillion dollars in 2015, which is still less that what is needed to pay benefits that have been claimed under the programs.
Proposals to Eliminate the Payroll Tax
Although many Americans have benefited from the current method of funding Social Security and Medicare, experts warn about the financial burden of a growing benefit pool and shrinking number of contributors to the programs. Both Social Security and Medicare will essentially be running in the red in a few years. Two Republican candidates for president for 2016, Ted Cruz and Rand Paul, have proposed eliminating payroll taxes altogether and shifting the financial burden to other tax vehicles, such as a value-added tax.
Arguments Against the Payroll Tax
Some opponents of the payroll tax believe it discourages work and is burdensome for low-wage earners. Others point out that the half of the tax paid by employers is essentially hidden from the view of taxpayers, who are unaware of the full cost of their government. However, it’s hard to believe that earners resent paying a tax that is essentially a contribution that will be paid back in the future, much like a contribution to a 401K. In addition, media outlets continually inform taxpayers about the costs of government, so it is hard to buy the premise that the public is aware of how much the U.S. government costs.
Where Will the Money Come From?
The total elimination of the payroll tax begs the question: Where can we get the same large stream of revenue that now comes reliably from payroll taxes? The question becomes particularly important because these same candidates are also proposing large cuts in income taxes. The value-added tax idea, or VAT, could be administered relatively easily. However, some express concern about how it would affect the overall economy. About 1/3 of the American economy depends on consumer spending. Adding a hefty tax, as much as 12.4 percent, would negatively impact spending in the country and would ultimately filter down to employment. In addition, a VAT would impact on lower-income populations much more severely than upper income groups.