Tax Analysts Blog

What if Congress Raised Taxes and Nobody Cared – Or Even Noticed?

Posted on Oct 23, 2014

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.
Baker is probably right. As he noted, the 2013 tax increase was especially dramatic, implemented in a single large jump rather than a series of small increases. If that sort of hike didn’t raise hackles, then smaller, phased-in increases would probably be even less controversial.

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.
Schug argued for keeping taxpayers on the hot seat. “Once people see how much they actually owe the government each quarter, there will be a tax rebellion that will make the Tea Party look like child’s play,” he predicted.

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.

Read Comments (8)

Robert GoulderOct 22, 2014

What? All this fear and loathing about tax hikes, but then most Americans
don't notice when their taxes actually do increase. Memo to K Street: Now we
can enact the Graetz plan and safely assume the public won't notice the VAT.

edmund dantesOct 22, 2014

Just as no one complained when the tax when up, no one noticed when it went
down, either. Accordingly, it had very little economic stimulus effect, though
it did add significantly to the deficit and the national debt.

sam youngOct 23, 2014

With all due respect to Mr. Goulder, his logic seems backwards. VATs and sales
taxes are high-salience, especially because they'd appear in front of consumers
daily. And I worry about following the logic of Joe's post, given that it would
put even more of a burden on labor income (even if there's also withholding on
capital gains, passthrough income would remain susceptible to underreporting).

robert goulderOct 23, 2014

Hi Sam. That's true for RST. Charged separately, highly visible to the
consumer. Not necessarily so for VAT, which is embedded in the price. That
said, I've never really bought into the argument that VAT is hidden from
consumers -- i.e., because it's not charged separately at point of sale.

It's a bit like the gasoline taxes we pay when filling up the tank. All of us
know there's a big old tax in there (well, most of us do) but it nevertheless
strikes some folks as being invisible because it's not separately rung up.
Similarly, many would argue VAT is obscured from view and thus a sinister
creation.

Someone once said "the most dangerous tax in the world is the one people can't
see, and thus don't realize they're paying." Forget who said that, but they're
probably correct.

vivian darkbloomOct 23, 2014

"Not necessarily so for VAT, which is embedded in the price."

Robert, I'm not sure what you are basing this on. It's a surprising remark
coming from someone at Tax Analysts.

Just this afternoon, I had a meal at a restaurant in France. Clearly stated
(or "highly visible" if you will) on the bill was the VAT charged for the food
(10 percent) and for the wine (20 percent).

While the price of goods on the shelf or a menu include the VAT, the EU VAT
Directive actually *requires* that VAT be a separate item on invoices given to
customers. It's the law. The VAT is no less visible to customers than sales tax
presently is to US customers. Both are listed on any invoice or sales slip.
The advantage of the EU practice on VAT is that the customer will know before
going to the checkout what the total cost will be. That certainly does not
make the VAT charge any "less visible".

Neither sales tax nor VAT is "separately rung up" (that would be a huge and
unnecessary waste of effort); but, the important point is that both are
separately listed on any invoice even though they are "rung up" at the same
time.

David Cay JohnstonOct 23, 2014

Of course at Tax Notes we did cover the story of the tax increase, including this column I wrote in February 2001.

Joe is quite right. I talked to a lot of people at the time who were totally unaware. And one of lessons about news is that, like advertising, without repetition understanding or awareness does not change.

robert goulderOct 24, 2014

Viv: You're spot on. I recently bought a cortado at Lake Como; the VAT charge
was clearly printed on the sales receipt (albeit in Italian). Still, about 50%
of the people I speak with about VAT will argue that it's a hidden tax. And,
yes, I take great pride in surprising people. Enjoy France.

Charles J. SmithOct 24, 2014

Did any one notice the one year tax break?

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