The payroll tax imposes, by a wide margin, the largest federal tax burden on middle-class families. As Social Security and Medicare spending commitments rose over the last half of the last century, the payroll contribution climbed dramatically. As recently as 1972, the combined employer-employee payroll tax rate was 7.5 percent. Today, it is 15.3 percent. According to the Tax Policy Center, in 2013, households in the middle quintile of the income distribution paid an effective income-tax rate of 4.3 percent. The effective payroll tax rate was 10 percent.
Some conservatives shy away from taking on the payroll tax because they view it as a lesser evil than the income tax. They argue that because the tax is not progressive (except for the Medicare component, above $250,000 in yearly income), it approximates a “flat” tax on consumption, not savings.
This is a terribly flawed understanding of the tax. The payroll tax is a tax on work, not consumption. Of course, middle-class families generally spend what they earn, and so when they pay taxes, they spend less. But these families can’t avoid the payroll tax by consuming less. Conservatives oppose raising the minimum wage and other mandates that raise the cost of labor and thus limit opportunities for lower-wage workers. They should approach the payroll tax in the same frame of mind because the payroll tax raises the cost of labor far more than any of these other federal mandates. An across-the-board payroll-tax cut would be a powerful pro-work, pro-growth policy.