How Repealing the Payroll Tax Would be a Wage Boost for All Americans

By James Dail (CMC ’20)

Republicans are still reveling over their passage of the new tax bill, as they should. It is the first major legislative victory of the Trump era. Reception for the bill among the general public has been mixed, and it largely falls alongside partisan lines. Only time will tell if the bill is broadly helpful or harmful to the U.S. economy. What the bill does make immediately clear is that any pretense of populism within the Republican Party has been abandoned in favor of traditional conservative orthodoxy. While there have been some promising early signs that the bill will boost the wages of Americans in minimum wage jobs, the Republicans missed an opportunity to reward the portion of the electorate that won the 2016 election for them. The most effective way to have done this would be to eliminate the payroll tax.

Wage growth has been lagging for several decades now, and when there have been wage increases, they have largely gone to the top 25% of income earners. As a result, it has become difficult for most people to live within their means. In 2014, 56% of Americans said that their wages were not keeping up with the cost of living. Eliminating the payroll tax would instantly give wage relief to these Americans. As it stands, it is a stunningly regressive tax, effectively operating as a 6.2% flat tax on all wage earners. So, the less money one makes, the better off one would immediately be. Even though this would benefit the neediest Americans the most, it ultimately gives a wage increase to all workers.

In addition to helping the advancement of poor and middle class Americans, eliminating the payroll tax would be beneficial in other ways. One of the chief objectives of the new tax bill is to cut taxes for corporations and make it easier to do business in the United States. The bill has already done a demonstrably fantastic job of this. It lowered the corporate tax rate from 35% to 21%, and many firms have announced that they will give their employees raises or end of the year bonuses. Others have announced that they will be relocating their offshore holdings back to the United States, allowing the treasury to gain more money. But Congressional Republicans could have gone even further, as eliminating the payroll tax would have given corporations an even steeper tax cut. This is because the payroll tax is paid out in two parts. In addition to the 6.2% tax that is paid by the employee, there is another 6.2% tax that is paid by the employer. Freeing up corporations from another form of taxation would encourage them to invest in the United States further. Additionally, since the payroll tax is, from the employer’s side of things, a tax on labor, eliminating it would be an incentive to hire more workers.

One pertinent objection to this measure is that the payroll tax was originally instituted with a specific purpose: paying for Social Security. Eliminating the payroll tax would take away Social Security’s chief funding measure, and would therefore endanger the program. This criticism may be overstated, though. Social Security would need a new funding mechanism such as a a new tax or raising the rate on a preexisting one, though despite Republican disdain for such actions, either option could feasibly be done. . In fact, either could be done in a way that is more beneficial to society. For example, tying Social Security to the capital gains tax, and raising the rate, could shift the burden of paying for it towards passive income earned by the wealthy, as opposed to active income earned by workers. This would ensure that the ones paying into the program are people who actually have some extra income to spare.

While certainly helpful, the wage boost given to workers by corporations after the corporate tax cut is limited to several firms, and the possibility that it will not be continued in subsequent years remains. Eliminating the payroll tax would serve as a permanent wage increase for millions of workers across America, and it would allow even more corporations to bestow raises and bonuses on their workers.

 

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