In fact, the person who is required to pay a tax to the federal government is often different than the person who bears the tax burden. The graph below roughly illustrates how the labor market distributes the payroll tax burden. The fact that the labor supply line is steeper than the labor demand line is a way of showing that workers are less sensitive to changes in wages than employers.
This means that, rather than workers and employers each paying 7. Next, workers pay their 7. This is an issue because it violates the principle of tax transparency : a tenet that states that tax burdens should not be hidden from taxpayers in complex structures. Because roughly half of the payroll taxes that fund Social Security and Medicare are hidden in the form of lower wages, rather than being entirely spelled out on our pay stubs, voters may underestimate the true budgetary impact of these social programs.
In summary, payroll taxes are a significant source of government revenue , but the burden of the payroll tax and the government programs they pay for may not be entirely apparent to taxpayers, due to how the taxes are levied. In the next blog post on this topic, we will cover how effective these taxes are, as well as other potential issues they may have.
The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you. Since , the taxable maximum has generally been increased each year based on an index of national average wages.
Each year, about 6 percent of the working population earns more than the taxable maximum, which has been the case since Proponents of increasing or eliminating the limit on earnings subject to the Social Security payroll tax argue that it would make the tax less regressive and be part of a solution to strengthen the Social Security trust funds.
Another argument is that removing the taxable maximum would adjust for the fact that higher-income individuals generally have longer life expectancies and thus receive Social Security benefits for a greater amount of time.
Opponents argue that increasing or removing the taxable maximum would weaken the link between the amount individuals pay in Social Security taxes and the amount they receive in retirement benefits.
Opponents also contend that while low-income earners may pay a greater share of their income in Social Security taxes than those who are wealthier, they also receive a disproportionate share of government transfer payments that are not subject to the tax.
Those opponents cite programs that have been created to — at least partially — offset the regressive nature of the Social Security payroll tax. Some economists anticipate that if the limit were lifted, employers might respond by shifting taxable compensation to a form of compensation that is taxed at a lower rate. For example, employers could decrease wages but increase retirement benefits, which are deductible under the corporate income tax, in an effort to offset the additional payroll taxes they would owe.
Employees and employers each contribute 1. Since , an additional 0. For , HI tax revenues were 1. The HI tax was originally the primary source of revenues for Medicare before the program grew to include Medicare Advantage plans and prescription drug coverage. Many countries in the Organisation for Economic Co-operation and Development OECD , a group of nations with high-income economies, also fund their social insurance programs with payroll taxes.
While the Social Security systems of other countries take different forms, most provide government-financed pensions that provide income assistance for retirees, similar to that of the United States. Despite that similarity, there is much variation in how other OECD countries impose payroll taxes on their citizens. Employers pay a share of some payroll taxes for their employees. Before , the tax rate for self-employed people was less than the combined tax rate on employers and employees.
Those days are over, though. Federal payroll taxes are consistent across states, while state payroll taxes vary according to the income tax rates in each state. The portion of payroll taxes that the employer withholds on behalf of the employee are liabilities for business accounting purposes.
The employer is playing the role of an agent for the government, collecting taxes from employees and remitting them to the state and federal government. However, the matching share of FICA taxes that the employer pays on is considered a business expense, not a liability.
The current tax rate for Social Security is 6. The current rate for Medicare is 1. That means that combined FICA tax rates for are 7.
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