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Reform
the Payroll Tax
February 11, 2003
By John Mattar
As the Republicans continue to push proposals for tax cuts,
progressives need to reach consensus on fundamental tax reforms
in order to provide a unified counter to the Republican proposals.
It is one thing to criticize Republican tax proposals. It
is another to offer concrete alternatives.
For far too long, the Republicans have dominated discussion
of tax rates and tax cuts. They have consistently misled the
American people by focusing on the personal federal income
tax, when in fact it is the payroll taxes that have the greatest
impact on lower to middle income earners. Progressives would
focus tax cuts on the lowest income earners. Who could possibly
need more tax "relief" than those at the lowest income levels?
Progressives should rally around a set of basic, structural
tax reforms aimed at restoring progressivity to taxation.
We need to present a straightforward, compelling agenda of
tax reform to the voting public. We need to make clear to
working Americans that their interests would be well served
by progressive tax reform. We need to make bold, focused,
and achievable proposals for reform. We need to ask upper
and upper-middle class Americans to forgo any tax cuts and
to in fact pay more. We need to recapture the public agenda
on taxation.
There should be two basic principles for distributing the
tax burden.
First, tax policies should maximize the rewards of work and
earnings, especially at lower income levels.
Second, earnings should be taxed progressively. Those who
earn more in absolute terms can afford to pay more in relative
terms. This does not mean that taxes should ever be oppressive
to the point of discouraging work. It does mean, however,
that lower-income earners should be taxed at lower rates than
higher-income earners.
The current structure of federal taxation does not meet these
goals.
Much debate over taxes focuses on the federal income tax.
This is misleading, primarily because the payroll taxes that
have the greatest impact on low to middle-income workers.
Additionally, the Social Security tax is one of the most regressive
taxes in the county.
Consider the combined impact of the Social Security tax and
the Medicare tax (the payroll tax). Wage earners pay both
of these taxes from the very first dollar earned. The Social
Security tax is 6.2% and the Medicare tax is 1.46%, for a
total of 7.66%. That is significant to workers earning low
incomes. If a person earns just $10,000 per year, he or she
pays approximately $766 dollars a year in these payroll taxes.
Someone earning just $20,000 per year pays approximately $1532
per year. This is a significant amount of money for someone
living from paycheck to paycheck.
Two Fundamental Reforms
Two fundamental reforms could go a long way in addressing
the inequities of the current tax system.
1) Provide a rebate of payroll taxes each year to all workers
earning less than $20,000. This could be done on a sliding
scale where those making less than $15,000 get all of their
payroll taxes back, while those making between $15,000 and
$20,000 get some portion of their payroll taxes back. Such
a reform would provide a permanent, large-scale, working-class
tax cut to those who need it most. It is also a consumer-oriented
tax cut, providing sustained stimulus to the economy. The
next proposal can provide the funding for this tax cut.
2) Eliminate the "earnings cap" on the Social Security tax.
People making more than $80,400 per year pay no additional
Social Security tax on earnings above $80,400. Someone making
$80,400 per year pays - in absolute terms - as much Social
Security tax as someone earning $100,000, $150,000, or even
$1,000,000 per year. In relative terms, workers earning $80,400
or less pay a higher percentage of their earnings in Social
Security taxes, making Social Security a truly regressive
tax. The less you earn, the greater the percentage you pay
in tax. This is exactly the opposite of the way taxes should
work. This aspect of the Social Security tax is almost never
discussed in American politics. (Republicans who champion
a flat tax should be reminded that progressives might call
their bluff and propose a truly "flat" Social Security tax
on all income. )
The table below shows the approximate "effective" Social
Security tax rate for various income levels.
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Annual
Earnings ($)
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Social
Security Tax Paid ($)
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Social
Security Tax Rate
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10,000
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620
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6.2%
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20,000
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1,240
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6.2%
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80,400
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4,984
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6.2%
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150,000
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4,984
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3.3%
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250,000
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4,984
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2.0%
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500,000
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4,984
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1.0%
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1,000,000
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4,984
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0.05%
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5,000,000
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4,984
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0.01%
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Citizens for Tax Justice estimates that the elimination of
the "earnings cap" would generate an estimated $52.8 billion
in additional annual revenue (year 2000). That could pay for
a full rebate of the payroll tax for up to 34.4 million workers
earning $20,000 each year .
These proposals are not only good policy, they are also good
politics. Most people earn less than $80,400 per year. Many
of them are unaware of the "earnings cap" on Social Security
taxes. It is time for an honest debate about the real impact
of taxes on "working families".
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