Mises Daily Articles
The Forgotten Payroll Tax
It's a huge tax that most Americans don't understand. And most of those who support leviathan government want to keep it that way. They're betting on the apathy and ignorance of the average American when this tax is discussed.
So they hope you'll just forget about this burdensome tax, which has been raised dozens of times over the last 40 years, and turn your attention to other things. If one of these leviathan enthusiasts was at your side now, he'd ask if you didn't want to forget about this article and read something else. Maybe turn to the sports pages, he might suggest, invoking a beer and circuses logic.
Still, properly understood, it's hard to forget how much this regressive tax takes from all of us. I'm speaking of the payroll tax, which is used to pay for two very financially questionable social insurance systems, Social Security and Medicare. These are shady systems with trust fund assets that have been pillaged over the years to pay for other government programs, a putrid, robbing Peter to pay Paul practice that, when used in the private sector, usually ends with people sent to the hoosegow for many years.
Yet these social insurance systems have, until the last generation, escaped most public scrutiny, criticism and analysis. Indeed, despite their mismanagement, Social Security is, and has been, incredibly popular with tens of millions of Americans. And this has been going on throughout my life, regardless of who was in power.
As a young man, some 35 years, I remember when I started to pay this tax. When I asked about it, I can hardly ever remember anyone uttering a harsh word about Social Security. There were few critics then. And those hardy souls who said there were problems with the system usually were either ignored or ridiculed in major media outlets, depicted as vicious people who ate babies for breakfast after they threw grandma out into the cold. Other taxes would be sometimes questioned, but not the payroll tax.
Almost everyone understands the destructive powers of the income tax. Indeed, a great libertarian once wrote a brilliant little book linking it to the birth of big government in America.1 In recent years, lobbying groups have formed to reduce or eliminate the estate tax, which destroys small family businesses across our nation, costing thousands of jobs. Many think tanks have correctly preached the virtues of smaller capital gains taxes. Some have even taken these arguments to their logical conclusions and have called for the end of the capital gains tax.
Taxes on savings have led many to question why there is a penalty on thrift. Even that great Bensonhurst busdriver, Ralph Kramden, in an episode of "the Honeymooners" devoted to the nightmares of tax returns, asked, "You have to pay a tax on savings accounts?" Yes, indeed Kramden's $75 bank account was--and still is some 50 years later—subject to a tax. But few have pondered the effect of the payroll tax. It is a tax that has gone from being another nuisance tax to a tax that now takes an enormous part of our income and will likely take much more.
That's because, I believe, there are few people who understand the pricey payroll tax. And there are even fewer Americans who even know what the correct rate is (Hint. It's higher than you probably think it is). The payroll tax rate now is a total of 15.30%. It is split between the worker and the employer. And, given the shaky foundations of the Social Security/Medicare systems, we will likely soon hear, once again, that these systems "must be saved."2
This, of course, is a euphemism for increasing payroll taxes. It is another way of saying: "OK, sucker taxpayers, now you pay more." Already, the suckers are shelling out quite a bit. They pay more than most know.
For example, according to the Congressional Budget Office, 42% of American families are paying more in payroll taxes—taxes that go to pay for Social Security and Medicare—than they pay in income tax. And here, once again, is another source of confusion about payroll taxes.
The 42% figure doesn't include the amount that your employer pays on your behalf. So when public officials quote the 7.65% rates for the system they are either ill informed or deceptive. (Actually, either one is a good bet. Nevertheless, since most pols are Social Security shills, my money—or the measly amount that remains after Uncle Whiskers has picked my pockets—is on the latter).
When the employer paid portion of the tax is added, then the percentage of American households that pay more in payroll taxes than income taxes is 74%. Since your employer is paying the tax on your behalf, it certainly is reasonable to include the higher figure. However, I have heard more than one defender of the system, such as my clown congressman, say that payroll taxes are "only 7.65%."
Anyone who doubts that the tax is actually 15.30%, who believes tall stories of our leviathan loving pols and administrators who never have a bad word for this system, is invited to speak with the average independent contractor. Ask this entrepreneur if it is "only" 7.65%. The independent contractor has no boss so this poor schmuck—whose crime is that he or she is trying to build a business in a nation run by career pols who hate commerce—is the on the hook for the entire tax!
Given the sleazy nature of how the system has been run from day one, the taxes are likely to go up again and again. Indeed, numerous Social Security/Medicare experts have predicted that the payroll taxes will have to be raised somewhere between two percent and ten percent over the next few years just to keep all the promises made over the years by past Congresses and presidents. Many of these politicos had a nasty habit in the 1950s, 60s and 70s of raising benefits just before elections, then passing the costs of their "generosity" to the next generation.3
We are the next generation. And the rising rates are a consequence of these long forgotten pols.
The bills for this skullduggery have been coming due over the last twenty years, which is why payroll taxes have gone through the roof (Indeed, there was an HEW Secretary back in the 1960s who thought payroll taxes would never exceed 10%.)4. Some readers, who were raised in the 1950s and 60s when nary a bad word was ever said about Social Security, will object to my characterization of these programs as "skullduggery."
But, for a moment, forget your age and imagine that you are a young worker who is about to enter into this system or has been "contributing" to it for just a few years.
According to Boston University economist Laurence J. Kotlitoff, 18-year old workers who earn average incomes over their lifetimes will "contribute" $723,591 in taxes (in present value dollars). They will receive about $140,000 in benefits! What private sector retirement program has an egregious record such as that? And even when it does, one can always withdraw from it or transfer to another program. Try withdrawing from Social Security and see what happens!
This is robbery of an entire generation of workers, a generation that never had a chance to save and invest for themselves. But—like yours truly—they were simply forced into a shoddy system that rips off taxpayers, then tells them how lucky they are to have this wonderful system that protects them in old age.
Of course this begs the question—if Social Security is so good, then why are people forced into the system? As with so many other things the federal government does when confronted by criticism, it lies, flimflams and obfuscates.
Remember, the federal government's Social Security policy is clear. Its goal is to ensure that you, dear taxpayer and fellow victim of a scam that never ends, don't understand what is happening to your money. This planned ignorance is a fact that was admitted by a Social Security official many years ago.
"Continued general support for the Social Security System hinges on continued public ignorance of how the system works," the official told Baron's Weekly on April 26, 1965. "I believe that we have nothing to worry about because it is so enormously complex that nobody is going to figure it out."5
- 1. The Income Tax., Root of All Evil, by Frank Chodorov (The Devin-Adair Company, New York, 1954).
- 2. Jimmy Carter supposedly saved the system by agreeing with leaders of Congress to raise the rates in the 1970s. However, the savior scam didn't work for very long. By the 1980s, Ronald Reagan, along with the Democrats in Congress decided to "save" the system by—you guessed it—hiking the rates. By the end of Bill Clinton's second term at the end of the 1990s, Clinton said the then federal government surplus should be used to "save Social Security." Social Security has been "saved" more times than a character in Sinclair Lewis's timeless novel of American evangelism, "Elmer Gantry."
- 3. It is a supporter of Social Security who noticed this tendency to pass on the rising costs of social insurance to future generations. "The first beneficiaries generally received much more in benefits than they contributed and the last generation must be concerned with who will pay for these benefits." These comments are from the economist Lester Thurow as quoted in the book "Turning Points in Social Security," by S. Tynes, p 32, (Stanford University Press, 1966).
- 4. The Health, Education and Welfare Secretary was Abraham Ribicoff. To learn more about Ribicoff's 10 percent limit, see "Policymaking for Social Security," by Martha Derthick (The Brookings Institution, Washington,. D.C., 1979. P. 201).
- 5. As quoted in "The Social Security Fraud," by Abraham Ellis, pp 58–59 (FEE, Irvington-on-Hudson. New York, 1996.