Payroll Taxes and the Meaning of Words

Jan 2, 2013

The words we wrap our numbers in can play a key role in how well those numbers are understood. A great example of this is the question of “payroll taxes” – the payments employees and employers make toward Social Security and Medicare. They are a major topic in the raging debate about the “fiscal cliff,” but I have to ask: Are “payroll taxes” really taxes? The answer to this question has important public policy implications; it’s not just a question of semantics.

As Social Security in the 1930s and Medicare in the 1960s were originally marketed to the American public, we would ultimately receive in benefits basically what we put in through employee and employer contributions. To reinforce this notion, these contributions are placed in trust funds and managed by trustees who must report annually on the solvency of the trust funds. In this respect, one can argue that Social Security and Medicare contributions are no more a “tax” than are the contributions that we make to our 401(k) or IRA accounts, or the medical insurance premiums we pay.

But these days, there is increasing discussion about unhooking the contributions we make from the benefits we receive, as well as action in that direction. For example, an important source of funding for Obamacare is a surcharge on some investment income and a higher Medicare tax rate on employees with high earned income; and for the past two years we’ve enjoyed a 2% reduction in the employee contribution for Social Security. These make Medicare and Social Security contributions more consistent with our usual notion of what “taxes” really are – that is, payments collected by the government, which it can spend as it sees fit. And Social Security really becomes just welfare for old people, and Medicare just government-paid healthcare for old people.

I’m not taking an advocacy position here, but if Social Security and Medicare contributions are really just “taxes” unrelated to the benefits provided, then. . .

  • The whole notion of trust funds and solvency is irrelevant – Social Security and Medicare are simply general obligations of the federal government, funded by general tax receipts.
  • Why bother with a taxation approach that is not only extremely regressive, but just by its nature as a system separate from income taxes, cumbersome and inefficient? And if these contributions are not taxes, but the properly funded prepayment schemes that they were originally marketed to us as, let’s act accordingly. Taking some middle ground here is neither honest nor efficient.

“Painting with Numbers” is my effort to get people talking about financial statements and other numbers in ways that we can all understand. I welcome your interest and your feedback.

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