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Abstract
April 15 is synonymous with taxes in the United States, but most Americans actually pay more payroll taxes than federal income taxes. In 2006 workers and employers each paid 6.2 percent Social Security tax on the first $94,200 of earnings and 1.45 percent Medicare tax on all wages. While the statutory obligation to pay payroll taxes is split evenly between workers and employers, most economists believe that the employer tax usually translates into lower wages, so workers bear the full burden of the tax. Thus, the total payroll tax rate equals 15.3 percent of earnings for most workers.
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Two-Thirds of Tax Units Pay More Payroll Tax Than Income Tax
April 15 is synonymous with taxes in the United
States, but most Americans actually pay more payroll
taxes than federal income taxes. In 2006 workers and
employers each paid 6.2 percent Social Security tax on the
first $94,200 of earnings and 1.45 percent Medicare tax on
all wages. While the statutory obligation to pay payroll
taxes is split evenly between workers and employers,
most economists believe that the employer tax usually
translates into lower wages, so workers bear the full
burden of the tax. Thus, the total payroll tax rate equals
15.3 percent of earnings for most workers.
About two-thirds of taxpayers owed more payroll
taxes (including the employer portion) than individual
income taxes in 2006. Many households (including most
retirees) do not have any wage income and thus pay no
payroll tax. Among households with wage earners, 86
percent have higher payroll taxes than income taxes,
including almost all of those with incomes less than
$40,000 and 94 percent of those with incomes less than
$100,000. If only the employee portion of payroll taxes is
considered, 44 percent of taxpayers and 56 percent of
wage earners pay more payroll tax than income tax,
including nearly 80 percent of earners with incomes less
than $50,000.
The payroll tax is very regressive with respect to
current income: The average tax rate falls as income rises.
The income tax, in contrast, is progressive. The regressivity
of the payroll tax is mitigated to a substantial extent
when Social Security and Medicare benefits are considered
as well (not shown).
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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
