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![handle is hein.taxfoundation/iretcgadv0064 and id is 1 raw text is: January 9, 1998 No. 67
REMOVING THE INCOME CAP ON
THE PAYROLL TAX:
BAD POLICY AND NO SUBSTITUTE
FOR REAL REFORM
Senator Edward Kennedy
(D-MA) has recently proposed [T]he increas
eliminating the cap on income payroll tax rat
subject to the payroll tax. The income worker
cap is $68,400 in 1998 for the the margin, by
portion of the payroll tax used ing reduction
to finance social security irg re u
retirement and disability work... Treasu
benefits (12.4%). The portion and income t
of the payroll tax used for wages, offsettii
hospital insurance under of the presu
Medicare (2.9%) is already increase.
collected on all wages without
limit. Senator Kennedy would
use the revenue to lower the payroll tax rate. As a
result of these changes, the payroll tax would rise
for upper-income wage earners
as more of their wages became
subject to tax, and would fall [T]n increase
for lower and middle-income the payroll ta3
workers as the payroll tax rate additional soci
was reduced. The break Ultimately, hig
even wage would be about revenue losses
$80,800. incentives ... w
almost 75% of
Simply eliminating the tax [leaving] inade
cap would lift social security cover the payrt
revenue by about 18%,
assuming no economic reper-
cussions. That revenue would be enough to trim the
retirement and disability portion of the payroll tax
by about 1.9 percentage points, from 12.4% to
10.5%. Of course, there would be economic
repercussions to consider.
The reduction of the payroll tax rate would lift
the after tax marginal wage by about 2.9% for most
workers, a small incentive to work harder.1
However, the increase in the marginal payroll tax
rate by 10.5% on wages for upper-income workers
would cut upper-income workers' after-tax wages,
at the margin, by about 20%, a crushing reduction
in their incentive to work.2 On an income-weighted
basis, there would be a net reduction in work
incentives economy-wide. Labor costs would have
to rise to attract the
e in
... W
s' afte
aboui
in tht
ry wo
rxes o
ig abt
med
in wa
entit
al sec
her b
due to
ould o
the r
quate
l tax
the marginal
ould cut unner-
same total supply of labor, and,
in particular, to acquire the
same level of talented, trained,
and skilled labor.
r-tax wages, at The tax increase would be
enormous for highly-paid
2% ancrush-e to entertainers, sports stars, and
ir incentive to CEO's of big firms, but they
uld lose payroll would not be the only ones
in the drop in injured. Millions of owners of
Jut one-quarter moderately successful farms
static... tax and small businesses, and
many self-employed profes-
sionals would suffer. Major
growth industries relying on
highly-trained, highly-talented technicians, such as
computer software and hardware, would be hit, and
would be inclined to move
some of their operations
iges subject to abroad. Another essential
ties workers to growth area, medicine, would
urity benefits... feel the pressure of rising
enefits and the costs.' The more highly taxed
o reduced work workers would vacation longer,
offset or absorb see fewer patients and clients,
evenue gains.., and sell their businesses and
net revenue to retire earlier than otherwise.
rate reduction. People they would otherwise
have employed - agricultural,
industrial, and service workers
Institute for
Research on the
Economics of
Taxation
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