Eight in Ten U.S. Households Pay Social Security and Medicare Taxes

By :: September 12th, 2013

While relatively few low-income people pay federal income tax, a large and growing share owe Social Security and Medicare payroll taxes, according to new estimates by the Tax Policy Center. As a result, while about 43 percent of all households will pay no federal income tax this year, only 14 percent will pay neither income nor payroll tax.

Once household income reaches $100,000, just about everyone pays both. But the story is more complex for those at the lower end of the economic food chain. Despite the oversimplified and inaccurate claims of some commentators, most low- and moderate-income households do pay Social Security and Medicare taxes, and the vast majority pay more in payroll tax than in income tax.   

Payroll-Income Tax graph 9-12-13

Nearly 63 percent of households in the lowest 20 percent of income (those making less than about $23,500) will pay some Medicare and Social Security taxes in 2013.

Many of those who don't are the low-income elderly. Because they do not work, they pay no payroll taxes. And because their incomes are so low—often only Social Security benefits—they pay no income tax.

My TPC colleague Amanda Eng estimates that among the elderly in the bottom 20 percent of income just 5 percent will pay payroll taxes and less than 1 percent will pay income tax. By contrast, among households with no members 65 and older, more than 8 in 10 will owe payroll tax while just 6 percent pay income tax.

Among all taxpayers in the middle 20 percent (between about $45,000 and $76,000) more than 85 percent will pay Social Security and Medicare taxes this year while 72 percent will pay federal income tax. Even among middle-income households, more than eight in ten will pay more payroll tax than federal income tax.

TPC also looked at who will pay payroll and income tax in 2023. A decade from now, a significantly larger share of low-income households will pay both levies. Among those in the lowest 20 percent of income, 72 percent will owe payroll taxes, up from 63 percent today. And 20 percent will pay income tax, up from 13 percent today.

Interestingly, while a greater share of middle-income households will owe federal income tax (86 percent v. 72 percent), slightly fewer will be paying payroll tax (82 percent v. 86 percent).

Overall, 80 percent of households will pay Social Security and Medicare taxes while 65 percent will pay income taxes. Two out of every three will pay more payroll tax than income tax. TPC includes the employer share of payroll taxes in its estimates.  

The rising percentage of taxpayers a decade from now will largely be driven by an improving economy that returns to full-employment and the scheduled expiration of the relatively generous versions of the Earned Income Tax Credit and the American Opportunity Tax Credit.    

The message from all this is pretty clear: It is simply not true that more than 40 percent of U.S. households pay no taxes, or even no federal taxes. While many may not pay federal income tax this year, 80 percent will pay Social Security and Medicare taxes. They do indeed, as the phrase goes, have skin in the game.

32Comments

  1. Eugene Patrick Devany  ::  6:49 pm on September 12th, 2013:

    A payroll tax is a tax on income. The combined employer and employee share is almost 16% on every dime under $113,000. This part of the income tax is important because it is the biggest structural job killer in the economy and has been overlooked by most congressional tax reformers.

    An “optional” net wealth tax is the best way to replace the 16% payroll taxes and a fair way to tax individuals based upon ability to pay. A 2% tax on net wealth (excluding $15,000 cash and $500,000 retirement funds) combined with a flat 8% income tax would be reasonable for more than 95% of the population. [Half the population would pay just 8% on wages, avoid 16% payroll taxes and pay no tax on net wealth]. An optional 26% income tax (plus deferred capital taxes on gains, gifts and estates) could also be paid by anyone who wants to avoid a net wealth tax. The C corporation rate could also be lowered to 8% with a small 4% VAT.

    Tax liability should adjust according to net wealth and ability to pay but this can coexist with a system where investors can choose to defer (but not escape) some of their tax liability.

  2. Michael Bindner  ::  2:34 am on September 13th, 2013:

    In a decade, the law could change. Ideally, employers will pay all payroll taxes with now employee contribution and equal crediting of amounts to each worker. They could also pay all income taxes for all but the top 20%. That number could conceivably go lower as well, although that would require an even higher VAT or Net Business Receipts Tax rate. Of course, it is more likely that the employee payroll tax, at least for OASI, will continue – although because of equal crediting of the employer levy there need not be any collection of payroll taxes up to the EITC level, so that the EITC can be dispensed with (the way to make low wage work pay is to raise the minimum wage a lot, rather than having the taxpayers support low wage employers). The cap on the employee contribution could also be lower, leading to lower benefits for the wealthy, which is a better alternative to means testing or bend points.

  3. Michael Bindner  ::  1:28 pm on September 13th, 2013:

    It is more likely to decrease wages than prevent hiring. People don’t avoid hiring due to taxes. They do it for workload reasons.

  4. Eugene Patrick Devany  ::  1:46 pm on September 13th, 2013:

    If U.S. wages cost 8% less than U.S. labor gains an advantage over outsourcing. Workers hold on to the other 8% and the increased spending leads to new jobs.

  5. AMTbuff  ::  3:44 pm on September 13th, 2013:

    With close to 10 in 10 households in line to collect Medicare and Social Security, I would hope that 10 in 10 households paid into these programs at some point. Then it’s a matter of what fraction of one’s life is spent earning vs. retired.

    Considering payroll taxes and Medicare taxes in isolation, without counting future benefits funded by these taxes, is a politically loaded exercise unless you believe, as many young people do, that the benefits will completely disappear by the time today’s young workers reach retirement age. I’m pretty sure that TPC’s researchers do not believe that.

    Anyone at TPC would agree that Social Security taxes and Medicare taxes have a highly positive real rate of return for low-income workers and a negative return for high-income workers. The former are getting a great deal and the latter a poor deal. These “taxes” are therefore qualitatively different for the two groups.

    So why the obsession with raw numbers of how many people pay tax? That “debate” is as meaningless as the current issue of National Enquirer. TPC should spend its valuable time on important and meaningful questions, not this nonsense.

  6. Fred  ::  9:14 pm on September 13th, 2013:

    Wealth is impossible to accurately measure, because value is indeterminate for all but a few types of assets.

    What’s the value of a privately held business? An apartment building? A diamond? A used car? My house? A boat? Land? A piece of art? Intellectual property? A blog?

  7. Ralph H  ::  11:48 am on September 14th, 2013:

    I wish this obsession with demonstrating that low income workers are paying their fair share (in SSI/Medicare) would end, even though they pay no income tax. Whether SSI is Al Gore’s “lockbox” or FDR’s “insurance” the real effect is to collect to workers and in large part to help out the most needy in old age. Most Americans are fine with this, and willingly contribute. I know of many older folks for which SSI provides their basic support.

    However, except for past borrowing SSI does not pay for federal outlays on defense, education, roads, etc. For this we need general revenue, mainly the income tax until we make a change (like VAT).

    I am very concerned about SSI/Medicare in that the Pols have not addressed the long term funding, especially in light of demographics and medical inflation. The entire subject is off limits for solutions.

  8. Vivian Darkbloom  ::  1:58 pm on September 14th, 2013:

    Further to your comment, here’s a link to an Urban Institute study with respect to average payroll taxes (Medicare and Social Security) compared with average lifetime benefits under those programs. This study shows that low and even average lifetime average earning cohorts (roughly the same cohorts not paying income tax) can expect to receive far more in benefits than paid into the system. Far from being an “income tax”, these payroll taxes are actually a “negative tax” for the majority of participants when one considers the entitlements that are directly linked to those payments.

    http://www.urban.org/UploadedPDF/social-security-medicare-benefits-over-lifetime.pdf

    That’s not to say we shouldn’t have a progressive social security and medicare system along with our progressive income tax system. But, by intentionally ignoring one side of the ledger of these entitlement programs, Mr. Gleckman gives a rather misleading and one-sided view. Sadly, this has become all too predictable.

  9. google adwords editor  ::  10:36 am on February 13th, 2014:

    I usually do not comment, however after reading a few of the comments here TaxVox

  10. Eugene Patrick Devany  ::  10:46 am on February 13th, 2014:

    The most important policy change is to replace the job killing payroll taxes with revenue from a value added tax (VAT). New U.S. jobs would be encouraged by making each job 7.65% less expensive and by increasing consumer demand with 7.65% more take home pay. Every developed country in the world considers the VAT to be the fairest way to tax different types of business across different taxing jurisdictions.

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