Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Payroll Taxes and the Minimum Wage

 There is a way that Congress could give a pay raise to working Americans, including the working poor. It could abolish payroll taxes or FICA (the Federal Insurance Contributions Act); this would boost salaries because every employee in the country has to pay around 12.4% of his or her wages in payroll taxes.

Naturally, these taxes fall hardest upon the working poor; around 10% of their pay gets taken out before they get it. That means any increase in the minimum wage will be offset by FICA. For example, if the minimum wage were raised to $15 an hour as many left-wing activists seem to want, workers would still only make around $14 an hour.


Notice that Democrats are not talking about this, even though it is inherently unfair. Around 34% of federal revenue in 2014 came from payroll taxes, according to the Tax Policy Center. That means the working poor pay a disproportionate amount of federal taxes. That imbalance has been getting worse over time. In 1960 the payroll tax accounted for around one sixth of federal revenues; now it accounts for one third.

The situation is made worse by the fact that neither of the FICA taxes, Social Security or Medicare, apply to people that income levels over $118,500. That means the affluent get an automatic tax cut when they make more than that amount. Another problem with the payroll tax is that the rich, who make most of their money from investments rather than salaries, can easily avoid it.

The system is inherently unfair, and it is not raising enough revenue to cover the expenses of either Social Security or Medicare. The obvious solution would be to scrap the payroll tax and go to something else, such as a national sales tax or a tax on wealth.

Implement a Real Economic Stimulus—Scrap the Payroll Tax

Scrapping the payroll tax would give the vast majority of American workers a 10% pay increase. That would be a huge boost to the economy, and it would encourage job creation. Under the current system, employers have to pay up to $7,347 a year in payroll taxes for each employee on top of what the employee makes.


Scrapping the payroll tax would create a real economic stimulus that would have long-term benefits because it would stay around for years. It would take a political battle, but most Americans would support the idea.

Notice we do not hear any Democrats, such as the born again populist Hillary Clinton, talking about this. What’s sadder is that few Republicans have the courage to bring it up.


It is time we took a serious look at our entire tax system and started reforming it. We need to restore fiscal sanity in Washington and, more importantly, create a system that stimulates the economy and helps average Americans, not one that takes 12% of even the poorest citizens’ income for dubious purposes. We also need a tax system in which the rich pay their fair share.

If we raise the minimum wage but do not get rid of the payroll tax, we won’t do the poor any good. A system that finances government and benefits for the middle class on the backs of the working poor is both unfair and illogical. It needs to end.