It seems that all of the fiscal cliff attention is obsessively focused on upping income taxes (oops, I meant raising “revenues”).
Specifically, ideas are being floated to change marginal rates, eliminate deductions and close loopholes. All without dampening employment.
Yeah, right.
If the goal is really to raise tax revenue and boost employment, I suggest that the Feds look someplace else – at the payroll tax system.
For more background details, see our prior post Background: Here’s a way to raise tax revenues & create jobs.
Keep reading for the details …
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Background
Currently, the payroll tax program is structured with both employees and employers paying towards Social Security and Medicare.
Employees pay 6.2% (up to $113,700 in earnings) towards Social Security and 1.45% (uncapped) towards Medicare.
More specifically …
- Currently, there is a 2% stimulative “payroll tax holiday” temporarily reducing employees’ Social Security “contributions” from 6.2% to 4.2%
- Currently, neither the 6.2% nor the 1.45% are applied to “unearned income” such as interest, dividends and capital gains.
- As part of ObamaCare, starting in 2013, an extra 0.9% Medicare tax will be charged on wage and salaries above $200,000 for an unmarried individual or above $250,000 for a married joint-filing couple
- Also as part of ObamaCare, starting in 2013, unearned income will be subject to a 2.9% tax – the 1.46% employee contribution to Medicare and the 1,45% employer contribution to Medicare … for folks making more than $200,000 that number gets bumped by .0% to a total of 3.8%
Employers are required to match employees’ payroll taxes dollar-for-dollar.
- Self- employed people must pay the whole bill – both the employee and employer portions.
So, in combination, employees and employers pay 15.3% in payroll taxes (12.4% for Social Security and 2.9% for Medicare).
- Again, it’s currently 13.2% thanks to the 2% employee tax holiday.
- The effective rate is slightly lower since Social Security is capped at $110,100 in salary and wages.
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The Bold Idea
To grow the economy and increase domestic employment, I suggest:
- Eliminate employers’ matching portion of payroll taxes – i.e. reducing the employers’ share to zero.
- Uncap employee’s contribution to Social Security – i.e. use the Medicare tax base.
- Apply both the Social Security and Medicare taxes to unearned income.
- Provide all employees with a non-fundable income tax credit of $2,500 against payroll taxes – in effect, relieving low income employees of their payroll tax burden.
- Modify the payroll tax rates to achieve the requisite tax revenue targets — offsetting the elimination of employer matches and the non-refundable credits to low income earners.
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Benefits
- From a company perspective, the cost of labor is reduced by 7.65% …. about $2 per hour for a median wage earner, That should – at the margin – stimulate hiring hiring.
- The payroll taxes would be, in effect, a flat tax with no deductions … something many conservatives have been advocating for years.
- Tax revenues can be increased while helping, not hurting, small business owners.
- The payroll rates can be scaled appropriately to meet tax revenue targets for shoring up the Social Security & Medicare Trust funds
- The taxing scheme can evolve over time to completely replace the current tax code. Now, that would be tax simplification.
What do you think?
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