Issue 142 The Payroll tax is bad August 14, 2013

For those who do not know, the Pay roll tax is actually two separate income taxes under the Federal Insurance Contributions Tax (FICA) for both Social Security and Medicare. Together they act as a flat tax to support the United State's Social Security and Medicare welfare programs. However, the tax itself harms the poor. It also hams businesses as well. So what can be done?

It Harms the poor: The payroll tax harms the poor in a couple of ways. For one it is an additional tax on their earnings. This means that on top of being taxed through the usual income tax, you are also taxed on your earnings again for Social Security and Medicare. As a result the poor are taxed more without any hope of reaching the yearly limit and thus having more of their income taken from them on a yearly bases. In contrast, the richest members of the United States pay off this yearly tax and thus have a chance to get a kind of tax break for the rest of the year. For those who don't know, the American Payroll tax has a cap so that after you are taxed up to a certain amount of money; you then will stop being taxed for the remainder of that year. Basically the poor are being kept in there place through a tax that is supposed to help them later in life for when they retire. Again there is a problem, the money that the poor get when they finally reach retirement age is minimal as they are taxed so many times that very little is contributed to the system (your welfare benefit at retirement is determined by how much of the tax you pay throughout your life time). Statistically speaking this hurts the Black and Hispanic members of the United States the most as they are usually the lowest income earners.

Harms Business/Poor together: What’s worse is that the payroll tax makes employers biased against the unskilled poor. An employer provides a matching amount of money toward a persons Medicare and Social Security taxation. So the employer will pay the same rate to the system on behalf of their employee. Thus, the problem. An employer is not going to dish out that money unless the person is very good or is highly skilled. The result is the employer skipping over many people who may be good workers for the most skilled ones or holding off on hiring all together. Therefore many of these poorer people lose the chance to acquire skills on the job due to this bias. Basically, if you are not worth the cost of training and later employment, then you are not worth hiring.

Businesses on their own are harmed because they have to comply with the paper work to pay this additional tax. It takes time and money which could have been reinvested into the business or even a new worker. Any expense causes businesses to make hard decisions so as to meet their bottom line. If a business does not get the necessary amount of profit they usually shut down making more unemployment. Because of these costs an employer may loose a chance to hire a new worker who may help his business grow and expand. Basically, when a business hires some one, they profit and the worker benefits through getting pay and acquiring new skills. Overall, employer, employee and the poor who may have gotten a job are harmed.

The fix: It is rather easy to fix this problem. You simply have to do away with the payroll tax in its current form. Instead use the current income tax code to provide the money necessary to fund Social Security and Medicare. To do this, a certain portion of your normal income tax would be marked off to go toward those programs. You do not have to change the current rate, but maybe eliminate certain deductions so as to ensure enough goes into the system. Basically you remove all current income taxes save the main one and have it so that a portion of that tax money goes toward Social Security and Medicare. No more double or triple taxation. Employers would not have to contribute the matching rate under this plan as all individuals would continue to pay in regardless of income. Basically there will be no more yearly caps on contributions, but at the same time everyone gets a tax cut. It would still probably need to be coupled with a means testing type system to insure only those who need it get the welfare benefits, but that is a small price to pay for a safety net.

Conclusion: Yes we harm the poor more through our tax code and keep them there because of it. Or at least it contributes to the problem. By eliminating this tax and using the existing code with this one minor addition it ultimately gives the poor more money in their pockets in the short term. As such they can afford a higher standard of living and maybe even not have to go on welfare. Due to this, those on the cusp of poverty may never fall into poverty and will have more money to invest in a better job and thus get a higher income which in turn creates a better safety net as higher pay equals a larger amount going into the system. Basically you encourage people to move up in income as it becomes in their best interest to earn more pay and thus have a better welfare benefit when they retire. No more double taxation, less poverty, and a simpler system that allows people to keep more of their income. Defiantly better than the status quo in my opinion.