On Tax Day, An Economist Outlines How The Payroll Tax Works

Apr 18, 2017
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ROBERT SIEGEL, HOST:

While we make much of the fact that today is tax day, here's a little context for that news. Almost two thirds of American households actually pay less in federal income tax than they do in payroll tax. Payroll taxes are typically withheld by employers, and they go towards funding Social Security and Medicare.

To talk more about this, we're joined by Eugene Steuerle. He's a co-founder of The Tax Policy Center. That's part of the Urban Institute and the Brookings Institution here in Washington, D.C.

Welcome to the program once again.

EUGENE STEUERLE: Glad to join you, Robert.

SIEGEL: Who pays payroll tax?

STEUERLE: Well, workers pay payroll tax. It's a tax on earnings, mainly wages, but it includes some income from partnerships as well. And you pay it from the very first dollar of earnings that you make.

SIEGEL: And the rate of tax that you pay on that money?

STEUERLE: The rate of tax is 15.3 percent, of which 2.9 percent goes to help support Medicare and the rest goes to support what people think of as Social Security or the benefits for Old-Age and disability insurance.

SIEGEL: Now, half of that is paid by the employer. So for the employee, it would be 6.2 percent.

STEUERLE: That's right. But most economists believe that the employee pays the employer portion of the tax in the form of lower wages.

SIEGEL: But that rate doesn't change the more money you make. You just hit a cutoff point, and you stop paying any more.

STEUERLE: That's correct. It's a flat rate of tax.

SIEGEL: So to compare the payroll tax to the income tax, I mean, when it comes to income taxes, more than 40 percent of households don't pay federal income tax, usually because they don't earn enough. And people who make over a quarter of a million dollars a year pay for most of the revenue that comes from the income tax. That's very progressive. Why is - why is it the same rate for everybody when it comes to the payroll tax?

STEUERLE: Well, the income tax supports most of the programs of government from defense to highways to actually a substantial portion of health care. The Social Security tax was deliberately designed to provide us with a pension in old age, and it follows at least approximately the design of private pension plans in the sense that you contribute money to the system and the money you get out of the system is at least related to the money you put in.

So it's almost like a mandated pension plan. We have to participate if we work so that we can have some benefits when we go into old age.

SIEGEL: So for most Americans, today isn't tax day. Every Friday is tax day.

STEUERLE: (Laughter) That's exactly right. So it's interesting because the very process of filing is one of the reasons the income tax, I think, is less popular than the Social Security tax.

SIEGEL: As opposed to just having it taken out of your paycheck every week that there's less...

STEUERLE: That's right. And you owe nothing at the end of the year usually.

SIEGEL: And you owe nothing at the end of the year. You've paid more (laughter) - you've paid more, but you didn't experience that one - one day of pain.

STEUERLE: Right, right. And you didn't reconcile the numbers. You didn't actually make the calculation and see how much you paid. So I doubt that most people realize how much they pay in Social Security tax.

SIEGEL: This hybrid system of the income tax and payroll taxes, also state taxes - you were at the Treasury Department in the past - does this make sense? I mean, is it a useful way of raising money to pay for government at various levels?

STEUERLE: Now you're asking my personal opinion. I think it's moderately useful. Both systems could use a lot of fix-up and reform. But having - having these two major sources of revenue, I think, makes sense.

SIEGEL: Well Eugene Steuerle of the Tax Policy Center, thanks for talking with us on tax day about the bigger tax than the federal income tax.

STEUERLE: I'm glad to have been here. And congratulations to all you taxpayers.

SIEGEL: (Laughter).

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