Right-to-Know Payroll Tax Reform

May 3, 2016
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I met with a group of House Republicans last week to talk about tax reform. Ways and Means chairman Kevin Brady is laying the groundwork for a major tax restructuring next year, and so GOP members are boning up on reform ideas. I discussed income tax reforms with the members, including the creation of Universal Savings Accounts. And, on payroll taxes, I proposed reviving the Right-to-Know National Payroll Act, a bill that passed the House back in 2000 but died in the Senate.

The federal payroll (or FICA) tax that funds Social Security and part of Medicare imposes a huge burden on workers and the self-employed. Liberals are right when they note that the 15.3 percent tax costs moderate-income people far more than the income tax does. In addition to the large burden, the problem with the payroll tax is that half of it (7.65 percent) is collected from employers and hidden from citizens because it does not appear on worker paystubs or annual IRS W-2 forms.

Economists agree that the “employer” half of the payroll tax actually falls on employees in the form of lower wages. Thus the tax reduces wages of American workers by $550 billion a year without them even knowing it. For transparency in taxation, Congress should change the administration of the payroll tax so that the full 15.3 percent is clearly visible on worker paystubs and W-2 forms.

The House passed the Right-to-Know National Payroll Act in 2000, which would have required W-2s to report the full amount of payroll tax. Even better would be to make the full payroll tax visible on weekly or biweekly worker paystubs. Full disclosure of this burden is needed more than ever given the huge expected cost growth in Social Security and Medicare.

Raising worker awareness of the full costs of these retirement programs would help open their eyes to the need for restructuring. The current chairman of Ways and Means was a co-sponsor of the 2000 bill, so this reform idea may have legs in 2017.

A broader right-to-know proposal from the Mackinac Center is here.

An overview of federal tax reform options is here.

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