Payroll Taxes, Mythology, and Fairness

68 Pages Posted: 27 Mar 2014  

Linda Sugin

Fordham University School of Law

Date Written: March 26, 2014

Abstract

As the 2012 fiscal cliff approached, Congress and President Obama bickered over the top marginal income tax rate that would apply to a tiny sliver of the population, while allowing payroll taxes to quietly rise for all working Americans. Though most Americans pay more payroll tax than income tax, academic and public debates rarely mention it. The combined effect of the payroll tax and the income tax produce dramatically heavier tax liabilities on labor compared to capital, producing substantial horizontal and vertical inequity in the tax system. This article argues that a fair tax system demands just overall burdens, and that the current combination of income taxes and payroll taxes imposes too heavy a relative burden on wage earners. It scrutinizes the payroll tax to debunk myths that artificially link payroll taxes to retirement security, and argues that these myths have lulled workers into accepting substantial and regressive tax burdens. Freed from the analytical limitations of an insurance label and a private-savings paradigm, policymakers can be better guided by fundamental principles of fairness. By refuting justifications for taxing capital income more lightly than labor income, and offering fairness arguments for taxing work less than investment, the article makes a case for equalizing the tax burdens on labor and capital income. Social Security’s outlays constitute one-fifth of total federal spending, and this article maintains that it should be financed by a fair tax.

Keywords: payroll tax, FICA, tax fairness, capital income, labor income

JEL Classification: H24, H55

Suggested Citation

Sugin, Linda, Payroll Taxes, Mythology, and Fairness (March 26, 2014). Harvard Journal on Legislation, Vol. 51, 2014; Fordham Law Legal Studies Research Paper No. 2416471. Available at SSRN: https://ssrn.com/abstract=2416471

Linda Sugin (Contact Author)

Fordham University School of Law ( email )

140 West 62nd Street
New York, NY 10023
United States

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