A Look at Payroll Taxes

It’s eye-opening to look at the role that Payroll Taxes have played over time as a source of Federal Revenues. The data are there, to be sure, but not presented quite as starkly as I am doing this morning. I have these data from the Office of Management and Budget, an agency of the White House (link, see Table 2.1).

The dramatic change in the 1950 to 2012 period has been the steep rise of payroll taxes as a percent of total revenue—and the almost parallel decline of corporate taxes. To make this picture even more dramatic, we can look all the way back to 1934 using the White House Data. Here it is in a tabular form.

Revenues as Percent of Total, 1934, 1950, and 2012
				Change from
	1934	1950	2012	1934	1950
Income Tax	14.2	39.9	47.2	33.0	7.3
Corporate	12.3	26.5	9.6	-2.7	-16.9
Payroll	1.0	11.0	34.1	33.1	23.1
Excise	45.8	19.1	3.2	-42.6	-15.9
Other	26.7	3.4	6.0	-20.7	2.6

Now it is well to keep in mind that payroll taxes are regressive, thus they apply only up to a salary/wage income of $110,100 in 2012 and (perhaps appropriately in year 2013) to $113,700 next year. Thus it does not cover all of the $250,000 which seems, today, to mark the boundary of “real” money. But it falls heavily on the working poor. For them the payroll tax is a real whopper, comparable or greater than owed income tax.

If we now drop down that Fiscal Cliff, that black line up there will shoot a ways higher. The graphic also shows that Social Security contributions loom very large in the eyes of the Federal Government. They represent more than a third of the total revenue stream.

For completeness, the Other category consists of estate and gift taxes (7.7% in 2012), customs and related fees (21%), and miscellaneous income (71.3%). Of that last about three-quarters are interest earnings of the Federal Reserve.

Excise taxes are levied on alcohol, tobacco, telephone services. It also includes windfall profit taxes and revenues associated with transportation and other sectoral activities.

Who has the power? If we look at changes between 1934 and 2012, we see that the lower quintiles of the population have borne the brunt of increases, 33.1 percent; those paying income taxes come next.  Those for whom the payroll tax is a meaningful levy saw it as the biggest tax increase in the 1950 to 2012 period! They bore the brunt of the relatively small increase in income taxes due to the tax-cutting that became a perennial favorite in politics in that later period. My youngest daughter, once long ago, still as a child, articulated the benefits achieved by the corporate and institutional sectors. Asked to share a toy, Michelle memorably said: “I want to share by myself.”

Taxes: a GDP Perspective

Reader russel, commenting on the last post, inspired another look at taxes and social security contributions. russel pointed to a graphic (link) showing that income taxes paid are 8 percent of GDP and essentially flat. What follows is a slightly different take on this same subject sticking to the 1960-2010 time frame. My data show all taxes paid (somewhat higher than federal income taxes alone) and also charts contributions made to “government social insurance,” to use the Bureau of Economic Analysis’ phrasing. I presume that it includes both Social Security and Medicare Contributions. Here is the graphic:

The total personal taxes paid averages, in this 51 year period, 11.9 percent of GDP. The trend line of the data is ever-so-slight up. The trend of social insurance contributions, which averaged 7.2 percent for the period, is strongly ascendant, but that may be due to the fact that the Medicare program passed in 1965.

I am again showing the top marginal tax rate for the period. It appears to have no influence on the trend of total personal taxes paid.  Recessions, booms, and busts, however, do show an influence. Booms and busts? Well, the biggest rise in tax collections as percent of GDP came during the dot-com boom, the biggest drop in the dot-com bust. And the next up-then-down is the housing bubble.

My conclusion is that tax rate shifts reflect the relative power of the various classes in the United States and act to distribute the wealth now in one direction, sometimes in another. When we do not feel a genuine threat—I’m thinking of communism now—the distribution is from bottom to the top. Oh, Stalin! Where are you when we really need you!

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The data I am using comes from the BEA using the facility located here. Following links from there, I used Table 2.1 for Personal Income and Its Disposition and Table 1.1.5 for Gross Domestic Product.

I am Still Sane

The Senate extends the payroll tax cut for two months. President Obama says: “I am very pleased.” He urges the House to pass this measure and says that he will sign it.

Now the Senate’s action amounts to an insult to the President—as indeed most of this year’s legislative activity has been. I am not even a mediocre student of American democracy, to be sure, but it seems to me that no president has been treated in this fashion by any Congress before—or got away with it. “I am very pleased” ??? What kind of nonsense is that? Up to this point I have staunchly believed that President Obama was born in Hawaii. That statement makes me wonder what planet he was born on. Either that or I have to start doubting my sanity.

Indeed this event is, as it were, a compressed little kernel of insanity. The payroll tax cut is actually a cut in Social Security program contributions (see this earlier post). That so-called tax should never have been cut in the first place. To treat Social Security contributions as a tax is to endanger the whole notion of social security as a right. The administration should never have advocated such a cut in the first place. Its belief in “stimulus”—as if you could buy public confidence with pennies on the dollar—was mistaken. At the same time Republican malevolence towards this administration is patent and amounts to contempt. Therefore President Obama’s “I am very pleased” sounds like abject servility.

The temptation is to believe that I’ve gone insane, that I’m neither seeing nor hearing right. But no. I still have my sanity.

Stimulus v. Confidence

Under the Tax Relief Act of 2010, individuals get a 2 percent reduction in their Social Security contribution to payroll taxes. That contribution is 6. 2 percent of gross earnings. In 2011, the deduction is 4.2 percent. This applies to earnings up to and including $106,800. Thus a person earning $45,000 would have paid $2,790—but in 2011 pays only $1,890. This amounts to $900 or, taken at a monthly rate, $75 a month.

I bring this up because the administration is pushing for an extension of this tax cut to 2012—in the name of stimulus. The presumption is that people will rush out and spend that $75 a month, lift consumption, and therefore create jobs.

Now in my mind Stimulus does not stand alone, as it were. It is intimately associated with Confidence. Pushing for a stimulus measure without improving public confidence—indeed by eroding it in wave after wave of public events that signal doom ahead—has only one absolutely predictable consequence. In this case it means that the Social Security Trust Fund (so-called) is forgoing revenues. In today’s environment, the public is at least as likely (1) to pay down still staggering credit card debt or (2) put that $75 in savings against the possibility of losing the job, or the necessary second job.

The minor stimulus the administration is advocating is, it seems to me, way more than matched by the defunding of government that it cannot stem. Meanwhile confidence is low—and zigzagging like employment gains. Here the temporally near-term and the longer-range view of confidence:

The first shows the Consumer Confidence Index from mid-1997 to January 2011. This index is produced by the University of Michigan and published by the Conference Board. The straight line is the trend of confidence over a 14-year period. Notice, please, that the "leveling-off" after each drop has taken place at a lower level—which is that supports the downward trend.

The second, which I have from an April 2003 paper from the Regional Economist, a publication of the St. Louis Federal Reserve Bank (link), shows us much more history of confidence using the same series, going back to the 1960s and ending in 2003. What that chart shows is that we’ve had periods of very low confidence twice before, once in 1973-1974 and again in 1993 or thereabouts. Current levels, not shown on that chart, are matching those.

You can measure confidence in surveys, but the feel is the thing. The current level of confidence, it seems to me, is lower than any earlier periods’. That measly stimulus of $75 a month, or much less for many, does not automatically cause the kind of spending-frenzy the administration really wishes to achieve. What we’re thinking, here in the boonies, is that a trillion in cuts is bound to cause massive layoffs somewhere. And that we have unpaid FAA employees inspecting things for safety because Congress has denied them the dough.