Question

If you were advising a Congressional candidate on how she should propose chnaged in the payroll tax, what would you recommend? In your explanation address issued of the tax incidence, as well as regressivity or progressivity of the tax.

Answer 1

A payroll tax is a tax withheld from an employee's salary by an employer who pays it to the government on their behalf. The tax is based on wages, salaries, and tips paid to employees. Payroll taxes are deducted directly from the employee's earnings and paid directly to the Internal Revenue Service (IRS) by the employer. In the United States, payroll taxes are divided into three main categories: Federal income, Medicare, and Social Security. The government also collects money for federal unemployment programs. Unlike the U.S. income tax, which is a progressive tax, you only pay payroll taxes on income you make up to a certain yearly limit. Any income you make over that limit, $137,700 in 2020, is untaxed, making the U.S. payroll tax a regressive tax.

Payroll taxes are collected by federal authorities and some state governments in many countries including the United States. These payroll tax deductions are normally itemized on an employee's pay stub. This itemized list typically notes how much is withheld for federal, state, and municipal taxes, as well as any collected for Medicare and Social Security payments.

Governments use revenues from payroll taxes to fund specific programs such as Social Security, healthcare, unemployment compensation, and workers' compensation. Sometimes local governments collect a small payroll tax to maintain and improve local infrastructure and programs, including first responders, road maintenance, and parks and recreation.

An employer is generally responsible to fund unemployment insurance. If qualified, a former employee can access these funds upon their termination of employment. The rate of unemployment insurance the employer will pay varies by industry, state, and federal fees. However, there are also some states that require the employee to contribute to unemployment and disability insurance.

Federal payroll taxes cover Social Security and Medicare contributions, which constitute the Federal Insurance Contributions Act (FICA) tax. An employee pays 7.65%. This rate is divided between a 6.2% deduction for Social Security on a maximum salary of $137,700, while the other 1.45% goes to Medicare. There is no salary limit on Medicare, but anyone who earns more than $200,000—or $250,000 for married couples filing jointly—pays another 0.9% for Medicare

The basic premise of Social Security and Medicare is that you pay into them while you work. You may qualify to withdraw from these funds after you retire or if you meet certain medical circumstances.