Washington is filled with debate and discussion about the economic burden of the federal income tax, which collected $1.13 trillion in FY2012 ($1.37 trillion if you include the corporate income tax).
Yet politicians rarely consider the economic impact of payroll taxes, even though these levies totaled $.85 trillion during the same fiscal year.
Yes, we had a gimmicky payroll tax holiday for the past few years. And it’s true that Obama has signaled that he wants to increase the payroll tax burden at some point to prop up the Social Security system.
But there’s rarely, if ever, a discussion of wholesale reform.
That’s actually a good thing. Compared to the income tax, the payroll tax does far less damage. And it’s not just because it collects less money. On a per-dollar-raised basis, the payroll tax is considerably less destructive than the income tax.
Why? Because it’s actually a form of flat tax.
- It has only one tax rate. There’s a 12.4 percent tax for Social Security and a 2.9 percent tax for Medicare, which means a flat tax of 15.3 percent.
- There’s almost no double taxation. The payroll tax applies to wage and salary income, as well as personal earnings from business activities (sometimes known as “Schedule C” income). But dividends, interest, and capital gains are generally spared – other than the 3.8 percent Obamacare surtax.
- There are no loopholes or deductions for politically connected interest groups.
And because of these three features, the tax is remarkably simple and doesn’t even require a tax form unless taxpayers have Schedule C income.