If You Want to Create Jobs, Cut Payroll Taxes

By Lloyd the Idiot

It’s pretty simple.  If you make it cheaper to hire people, employers will hire more of them.  More people working means more income tax revenue.  More revenue means [more to spend/more opportunity to cut taxes - take your pick], and the world is fine.

Take a look at this chart, though, and you’ll see the staggering increase in the percentage of federal revenue from payroll taxes, which, as described above, makes it more difficult for employers to expand their employee base.  You’ll see that, as a percentage of overall revenue, payroll taxes have gone through the roof over the past 50 years (click on the picture for more details).

 


Comments

  • TCJohnson says:

    Yes,but is that because payroll taxes have gone up or because there are more people working than there were in 1950?

  • FedUp says:

    If payroll taxes are cut, then how would social security and medicare be funded?

    Employers have already figured out a way to make it cheaper to hire people. They are moving high-paying white collar jobs overseas at an alarming rate. The loss of that income and tax revenue is one of the biggest problems our economy faces.

  • More people working over the past 60 years also would mean more people paying income tax. However, the percentage of revenue from income tax (not the rates, mind you) has been gone relatively unchanged.

    Where’s Cato to tell me I have it all wrong?

  • Eric the 1/2 troll says:

    I think there is probably a bit of important information in this piece but it does not necessarily automatically lead to an argument for cutting payroll taxes. First of all, payroll taxes (as a percentage of a person’s income) has not increased and a portion of it is capped. So the natural question is what demographic change has led to such an increase in payroll tax as a % of federal revenue? I noticed that federal pensions are one part of payroll taxes. Has this led to the observed change? I also noticed that corporate income tax has dropped at about the same rate that payroll tax has increased. Looks to ME like there has been tax policy change that has reduced the burden on the corporation and increased the burden on the employee. What might that policy change have been? Could it be the same one that has corporations paying a effective tax rate of around 17% versus 35+% for individuals?

  • liberal anthropologist says:

    Cut payroll, income, and corporate taxes. Consumption only. In any case none of this would be a big deal of the overall tax burden was much lower. That is the overwhelmping issue.

  • liberal anthropologist says:

    God, I hate typing on a phone.

  • FedUp says:

    Eric, payroll tax rates increased in the early 80s and the effect can be seen in the graph. It is true there is a cap on the social security portion that employees pay, but that cap has been rising at a rate higher than inflation.

  • On the linked site (click on the chart), there’s this:

    “Payroll taxes swelled following the creation of Medicare in 1965. Taxes for Medicare, combined with periodic increases in Social Security taxes, caused payroll tax revenue to grow from 1.6 percent of GDP in 1950 to 6 percent or more since 1980. Payroll taxes also include railroad retirement, unemployment insurance, and federal workers’ pension contributions.”

  • Eric the 1/2 troll says:

    “Changes in the shares of the various taxes in total federal revenue reflect these historical shifts. The individual income tax has consistently provided nearly half of total federal revenue since 1950, while other revenue sources have waxed and waned. Excise taxes brought in 19 percent of total revenue in 1950 but only about 3 percent in recent years. The share of revenue coming from the corporate income tax dropped from about one-third in the early 1950s to less than a tenth in 2010. In contrast, payroll taxes provided two-fifths of revenue in 2010, four times its one-tenth share in the early 1950s.”

    So the shift IS due to cutting corporate taxes and excise taxes while not cutting any spending. SO I fail to see why this creates an argument for cutting payroll taxes (unless you are arguing for increasing effective corporate taxes commensurately – which I would agree with).

  • Corporate taxes haven’t gone down, they’ve just decreased as a percentage of the whole. The overall tax burden has increased.
    http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=203

  • Eric the 1/2 troll says:

    Well, duh, Lloyd. All taxes have increased along with GDP. That is why you look at it in TERMS of GDP.

    Here are acouple other graphs that might help:

    http://www.huffingtonpost.com/2011/04/15/top-marginal-tax-rates-chart_n_849596.html

    (note even nominal corporate tax rate has dropped since 1950)

    http://mattbruenig.com/2012/02/06/corporate-taxes-at-record-low-profit-margins-at-record-high/

    (see first graph – shows trend of effective corporate tax rate – note 2011 is historic low effective historic tax rate).

  • FedUp says:

    Abolishing the corporate tax would probably do more to create jobs than anything else.

  • Eric the 1/2 troll says:

    Considering that the effective corporate tax rate was at a historic low in 2011 and unemployment was NOT, your theory is looking a little shaky there, FU.

  • G.stone says:

    Lloyd is correct. One of the major reason is as follows:
    The number of Sub Chapter “S” Corps has grown every since their inception into the IRS code. Those who own SubChapter “S “Corps pay both sides of the SS tax. They then file their taxes as an individual . They get whacked big time. Been there, done that. There are millions of small Business’s in America who operate under this model / filing structure. This is also the main reason the whole tax the rich thing for those “making ” over 250K year, is pure unadulterated BS.

  • Eric the 1/2 troll says:

    “Those who own SubChapter “S “Corps pay both sides of the SS tax. They then file their taxes as an individual .”

    Having owned and run a couple S corporations, I know of what I speak here. The owner pays both side of HIS payroll tax not that of his employees (for which the company/owner is only responsible for paying half – like any other company). Then all net income of the company flows through to his personal tax returns. That would be net income after expenses (which include payroll taxes). Of course, you can play games with payroll tax (like not pay yourself a payroll and take everything out as a owner draw) then you won’t have to pay ANY payroll tax as the owner, just income tax. But of course then you miss out on the great benefits in terms of retirement plans and the like so normally, you just pay the payroll tax and writeoff the expense but not always.

    “This is also the main reason the whole tax the rich thing for those “making ” over 250K year, is pure unadulterated BS.”

    Well, there is a reason that S corporations are so popular. You can write off many, many things as expenses that you can’t if you file business income under Schedule C. Fianlly, if you are netting over $250K via a S corporation year in and year out, you are doing very well indeed. Count your blessings and pay your taxes.

  • Cato the Elder says:

    “Where’s Cato to tell me I have it all wrong?”

    Not wrong, just incomplete. Tax policy needs to be in harmony with regulatory policy and monetary policy etc. etc.

    I can give you a very simple solution to our fiscal predicament, and you could execute it tomorrow. End all withholding, period. All hidden taxes as well like gas taxes, sales tax, etc. Make every taxpayer cut a single check to federal/ state/local on every April 15th and you’ll find out very quickly how much government people are really willing to pay for.

  • Let's Be Free says:

    The big bump in payroll taxes occured in the 80′s and into the 90′s. It was driven largely by bringing Federal Government employees into the social security system and requiring that FERS pensions be funded (on paper at least) at full normal cost, vs pay as you go funding for the old CSRS system that was closed to new employees. So sure, roll these increases back and get more federal employees — and see what that gets us.

  • Let's Be Free says:

    Oh, ya, and federal employee and employers started Medicare contributions in the 80s as well.

  • Martha Polkey says:

    “It’s pretty simple. If you make it cheaper to hire people, employers will hire more of them.”

    This is already being done effectively by many companies, which are firing employees with experience (those over 40 years of age) and replacing them with cheap young workers. The successful fight against unions has resulted in huge decreases in wages paid to workers. Some large construction companies are eliminating their regular workforces, period, and hiring workers by the job only. The battle against raising the minimum wage is constant.

    Cheap labor is what it’s all about in China, but now those workers are demanding better wages and conditions. As they climb up the ladder, we can say “excuse me” as we keep on stepping down.

  • Jay Hughes says:

    Some thoughts on Social Security

    1. We must increase the payout age higher than 65. Back when SS was created the average life expectancy was 60. If you made to 65 most likely you wouldn’t live much longer past 65 so it’s fairly obvious the gov’t didn’t expect to have hoards of people drawing social security for decades. If I had my way I’d see the age raised to 75.

    2. Give anyone born in 1965 or later the option to opt out of social security and their social security taxes. Basically provide a 100% SS deduction for anyone born in 1965 or later who contributes $150/month to some kind of retirement fund…IRA, 401K, etc. You show the documentation like you do with your mortgage deducution. Additionally for anyone who opts out and makes less than $250,000/year you are completely exempt from capital gains taxes as an incentive to long term investing in various securities to self fund retirement. If you don’t choose the opt out option you can pay social security taxes which can be tracked just like contributions to a private retirement fund. When you reach the payout age you get a payout and when the money runs out or it hasn’t grown sufficiently to match inflation due to it being placed in low yield (but theoretically safe) US treasury securities then you’re out of money. No borrowing from subsequent generations to subsidize This will allow, basically, my parents to live out their lives on social security while weaning future generations off of it and allowing us to fundamentally change SS into a solvent, individual, pay as you go system….just like a private retirement plan.

  • enviroman says:

    A couple of technical points:

    1. FICA withholding (and self-employment taxes) were raised significantly in the 80′s as part of the Reagan/O’Neill deal to “save” Social Security. I believe the Social Security retirement age was also increased at that time.

    2. Some economists would argue that these amounts have the primary effect of reducing employees’ take home pay, and so elimination or reduction would not reduce businesses’ costs, but would increase employees pay.

    3. These taxes are broad-based (but regressive). Everyone who has wages or “earned income” pays FICA or self-employment taxes. These taxes are in a sense the mirror image of income taxes – the rates are reduced the more income an individual has.

    4. Since the 1980s there have been significant decreases in income tax rates. The Bush tax cuts actually decreased the amount of income taxes collected (unlike the Clinton increases!) So while FICA tax rates have stayed the same (and the taxable wage base actually increases each year with cost of living), income tax rates during this period have declined.

  • Leej says:

    ok the real problem people are living longer and want to retire younger. and many have serious health problems. and i will stick my neck out here and most of these illness are imagined

    and it is putting a huge increase on public spending

  • Leej says:

    i will go another step here further my wife and a few friends said i didn’t look well. i spent 6 days in loudoun hospital and there was nothing wrong with me. and some of those doctors wanted me to even stay longer. because we had great health insurance. i say get rid of the health insurance so the medical community does not abuse it.

    and i am joking a bit perhaps some of these old farts should just die so there is care for the younger ones. ;) without health care insurance

Leave Comment