The Unfairness and Stupidity of the Payroll Tax

A temporary payroll tax cut was allowed to expire recently, meaning that payroll taxes are now removing an extra 2% from everyone's paychecks. Every corporation in the business of selling things to non-rich Americans is freaking out because they expect their customers to cut back on spending now. The working class has just seen its take-home pay reduced by 2%; working-class people will now have 2% less to spend on food, and clothes, and toilet paper, and everything else. It may be true that letting the payroll tax rise was foolish in the short term. It is definitely true that payroll taxes in general are, as constructed, a bad idea.

Who should be taxed? People who can afford to pay taxes.

And what should be taxed? Money that is not immediately necessary to pay for basic needs. This is the essence of progressive taxation. The people who can afford to pay more should pay more. The payroll tax represents the opposite of this idea. It only applies to the first $110K in earnings. That way, it makes sure to capture a significant portion of the earnings of all poor-to-middle-class people, and then cut off before capturing a significant portion of the earnings of any rich people. It is a tax that, by design, fucks the poor (whose welfare the government should be most concerned with protecting), and not the rich. This is the most important thing to know about the payroll tax.

If you are a full-time fast-food worker making, say, the minimum wage—$7.25 per hour, 40 hours a week, 50 weeks per year—you make $14,500 per year or $290 per week. More than six per cent of that is taken out of your check right off the top for payroll taxes. If you are a full-time CEO making $14.5 million per year, you also pay a little over six per cent—except, not on the last $14.4 million per year.
The payroll tax is the most unfair tax in existence. Any raise in the payroll tax represents a burden on the poor and middle class that specifically does not impose an equal or greater burden on the rich, who are more able to afford such a burden. This is asinine.

Yes, there are other many other kinds of taxes. Federal income taxes, sales taxes, property taxes, capital gains taxes. So—here is a stunningly simple and obvious idea—how about we ease up the payroll tax, which hits those who can least afford to pay, and replace that revenue with other forms of taxes that target those more able to pay? ("Because rich people can afford lobbyists," is the realistic answer, but we're talking about right and wrong here.) Raising virtually any of the aforementioned taxes would be a more fair way to bring in tax revenue than raising the payroll tax. Even just sliding the payroll tax higher up the tax bracket—so that it targeted, say, income starting at $40K, with no top limit—would be far fairer to the poor than the current system.

Income and wealth inequality in America stands at outrageous levels. In a nation where a tiny minority of the very rich control a huge, outsized portion of the wealth, it is just common sense, and common decency and common fairness to target our tax system where the money is. And where is the money? It is not in the paychecks of the poor, who need that money to, you know, pay for things like rent and food and other basic staples of survival. It is with the rich. And why has inequality exploded in America? Because of investment revenue, which flows to the wealthy, and which is taxed at an artificially low rate. A new, nonpartisan study out this month found that over the past 15 years, the period during which inequality was exploding, "By far, the largest contributor to increasing income inequality (regardless of income inequality measure) was changes in income from capital gains and dividends."

In other words, the rich, who make most of their money not from regular paychecks but from investments, got richer because of money from those investments—and, more germanely, because capital gains income is taxed at a lower rate than regular income. Think about that for a moment. The type of income that flows overwhelmingly to the rich is taxed at a lower rate than is the first dollar of the paycheck of the person who cleans bathrooms at Burger King.

YOU DON'T EVEN HAVE TO SCRUB TOILETS TO MAKE MONEY FROM INVESTMENTS, YOU JUST SIT IN A CHAIR.

None of this is secret. All of this is common knowledge, among the types of people who keep up with things like the U.S. tax structure. I point this out not as a revelation, but in amazement. The payroll tax should be abolished, and investment income should be taxed as what it is—income. If this were just slightly better understood by everyone who isn't rich enough to make most of your money from investments, the pitchforks would come out.