Two years ago, Congress raised taxes on almost every working American – and nobody cared. In fact, a lot of people didn’t even notice. That tells us something important about the way Americans view taxes. But it also tells us something important about how we collect them.
In 2011 and 2012, Congress cut the Social Security payroll tax by two points. More specifically, lawmakers reduced the portion of the tax levied on employees from 6.2 percent of taxable wages to 4.2 percent. (The portion paid by employers remained at 6.2 percent; most economists believe that this other half of the tax is also ultimately borne by workers in the form of lower wages.)
The payroll tax cut was explicitly designed to be temporary – a one-year shot in the arm for the struggling economy. After a year, lawmakers agreed to extend the cut for another 12 months. But on January 1, 2013, the payroll cut expired, and workers began paying the full 6.2 percent again.
And hardly anybody noticed.
Asked in early 2013 whether their payroll taxes had changed, 55.6 percent of respondents to a Google Consumer Survey said they didn’t know. Only 28.9 percent had actually noticed the increase. (To round things out, 8.3 percent said the tax had remained the same and 7.1 percent thought it had fallen.)
Dean Baker of the Center for Economic and Policy Research, which commissioned the survey, found these results illuminating. “Let’s face it,” he said. “The public cannot be too upset by tax increases if they don’t even notice when they take place.”
Baker suggested that the poll results might even point the way toward a long-term fix for the (eventual) shortfall in the Social Security funding:
- These survey results suggest that the public may not be especially adverse to a modest increase in the payroll tax, since they may not even notice it. This supports the findings of other polls that indicate that most Americans favor strengthening Social Security through revenue increases, such as raising the payroll tax rate or the cap on taxable wages.
In addition, the payroll tax has always been relatively well tolerated by Americans. In surveys asking Americans to rank various levies by their desirability, the payroll tax places near the middle of the pack – below “sin taxes” on alcohol and tobacco but above property, sales, and individual income taxes. (For a great roundup of popular opinion on taxes, take a look at the American Enterprise Institute’s “Public Opinion on Taxes: 1937 to Today.”)
The relative popularity of the Social Security tax probably derives from the popularity of Social Security benefits. Unlike most elements of the federal tax system (and especially unlike other big-money revenue raisers), the payroll tax makes a clear connection between taxes paid and benefits received. Indeed, that tight connection leads some people to view the payroll tax (incorrectly, in my view) as a sort of insurance premium.
But there’s another element of the payroll tax that also contributes to its popularity -- its invisibility. For most people, the tax is automatically withheld rather than consciously paid. That’s no small thing. Withholding makes taxpaying a lot less painful – as anyone who makes estimated tax payments can readily attest. When you have to sit down and write the government a check every quarter, you start paying attention to the cost of government – and who’s paying for it.
Small-government conservatives are well aware of this. Mark C. Schug, an emeritus professor at the University of Wisconsin-Milwaukee, recently made the case for abolishing withholding entirely (he focuses on individual income taxes, but the argument applies equally well to the Social Security levy).
When people have their taxes withheld from their paychecks, Schug wrote for The Hill, they’re less inclined to get mad about paying them. And that leads to passivity and (eventually) the inexorable growth of government:
- Taxpayers are inclined to look at the bottom line and pay little attention to how much of their salary or wages are actually taken by government. It’s like money they never saw. The pain comes in one or two drops at a time – not in a torrent each quarter.
That’s almost certainly true. But it’s also true that withholding is not going away. It’s a fundamental element of the American state – and a key explanation for its growth. And while that makes it a tempting target for anti-state ideologues, it also makes it entirely secure.