Payroll Tax Hike

Greg discusses Obama and Clinton's proposal to eliminate the cap on Payroll taxes.

Of the many ways to raise substantial revenue I view this as among the best. My hunch is that hiking the payroll tax will have limited negative effects for several reasons

1) Upper income wages are mostly economic rent. Individuals who make more than 90K a year are primarily living off of the fact that they are significantly more talented than lower income people and have a preference for high productivity jobs¹. These factors are largely fixed by a combination of genetics and culture and unlikely to be influenced by marginal tax rates.

2) The possibility for tax avoidance or evasion is lower with payroll taxes than the income tax. There are few exemption and no deductions making tax avoidance really difficult with the payroll tax. Moreover, a business would have to be complicit to engage in tax evasion. Both of these factors make the payroll tax more efficient.

3) The payroll tax treats workers in the same household independently. Payroll tax exemptions for one spouse don't affect the payroll tax owed by the other spouse. For example, raising the husbands payroll tax makes the wife more likely to work, not less. The income tax probably does the opposite in high income families.

4) People hate the payroll tax. Karl's Law states that given equal size tax bases the economic destructiveness of a tax is inversely proportional to how much people hate it. That is, people hate taxes that they can't wiggle their way out of. Those are precisely the most efficient taxes.



I chose teaching and practicing economics over teaching and practicing painting not because the significant pay differential but because I prefer interpreting abstract art rather than creating it.